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Trust Receipts Law


1. S Corp. obtained letters of
credit from M Bank to cover its
purchase
of
construction
materials. M Bank required
HTY, representative of S Corp.
to sign 24 trust receipts as
security for the construction
materials and to hold those
materials or the proceeds of
the sales in trust for M Bank to
the extent of the amount
stated in the trust receipts. S
Corp. defaulted thus M Bank
filed a criminal action against
HTY for estafa. Can HTY be held
liable for estafa under the trust
receipts law?
No. A trust receipt transaction is one
where the entrustee has the obligation to
deliver to the entruster the price of the
sale, or if the merchandise is not sold, to
return the merchandise to the entruster.
There are, therefore, two obligations in a
trust receipt transaction: the first refers
to money received under the obligation
involving the duty to turn it over
(entregarla) to the owner of the
merchandise sold, while the second refers
to the merchandise received under the
obligation to return it (devolvera) to the
owner. When both parties enter into an
agreement knowing fully well that the
return of the goods subject of the trust
receipt is not possible even without any
fault on the part of the trustee, it is not a
trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315,
par. 1(b) of the RPC, as the only
obligation actually agreed upon by the
parties would be the return of the
proceeds of the sale transaction. This
transaction becomes a mere loan, where
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Commercial Law

the borrower is obligated to pay the bank


the amount spent for the purchase of the
goods. In this case, the dealing between
HTY and M Bank was not a trust receipt
transaction but one of simple loan. HTYs
admissionthat he signed the trust
receipts on behalf of S Corp., which failed
to pay the loan or turn over the proceeds
of the sale or the goods to M Bank upon
demanddoes not conclusively prove
that the transaction was, indeed, a trust
receipts transaction. In contrast to the
nomenclature of the transaction, the
parties really intended a contract of loan.
It has been ruled that the fact that the
entruster bank knew even before the
execution of the trust receipt agreements
that the construction materials covered
were never intended by the entrustee for
resale or for the manufacture of items to
be sold is sufficient to prove that the
transaction was a simple loan and not a
trust receipts transaction. [Hur Tin Yang
v. People of the Philippines,G.R. No.
195117, August 14, 2013]
2. Spouses dela Cruz was in the
business of selling fertilizers
and agricultural products, for
which they were granted a
credit line by PPI, and to secure
it, trust receipts were issued
covering the goods to be paid
for by using the credit line. The
trust receipts contained the
following: In the event, I/We
cannot deliver/serve to the
farmer-participants
all
the
inputs as enumerated above
within 60 days, then I/We agree
that the undelivered inputs will
be charged to my/our credit
line,
in
which
case,
the
corresponding adjustment of
price and interests shall be

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made by PPI. Is there a trust


receipt transaction?

Products, Inc., GR No. 158649, February


18, 2013]

No.
The
contract,
its
label
notwithstanding, was not a trust receipt
transaction in legal contemplation or
within the purview of the Trust Receipts
Law such that its breach would render the
Spouses criminally liable for estafa.
Under Section 4 of the Trust Receipts
Law, the sale of goods by a person in the
business of selling goods for profit who,
at the outset of the transaction, has, as
against the buyer, general property rights
in such goods, or who sells the goods to
the buyer on credit, retaining title or
other interest as security for the payment
of the purchase price, does not constitute
a trust receipt transaction and is outside
the purview and coverage of the law. The
sale of goods, documents or instruments
by a person in the business of selling
goods, documents or instruments for
profit who, at the outset of the
transaction, has, as against the buyer,
general property rights in such goods,
documents or instruments, or who sells
the same to the buyer on credit, retaining
title or other interest as security for the
payment of the purchase price, does not
constitute a trust receipt transaction and
is outside the purview and coverage of
this Decree. When both parties enter into
an agreement knowing that the return of
the goods subject of the trust receipt is
not possible even without any fault on
the part of the trustee, it is not a trust
receipt transaction penalized under
Section 13 of P.D. 115; the only obligation
actually agreed upon by the parties
would be the return of the proceeds of
the sale transaction. This transaction
becomes a mere loan, where the
borrower is obligated to pay the bank the
amount spent for the purchase of the
goods. [Spouses Dela Cruz v. Planters
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Commercial Law

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Negotiable Instruments Law


1. W was accused of estafa for
using a bum check to defraud
another person. The check he
issued was payable to cash.
Can he be held liable for
estafa?
No. The check delivered was made
payable to cash. Under the Negotiable
Instruments Law, this type of check was
payable to the bearer and could be
negotiated by mere delivery without the
need of an indorsement. This rendered it
highly probable that W had issued the
check not to the person allegedly
defrauded, but to somebody else, who
then negotiated it to another. Relevantly,
the person allegedly defrauded confirmed
that he did not himself see or meet W at
the time of the transaction and
thereafter, and expressly stated that the
person who signed for and received the
goods in exchange for the check was
someone else.
It bears stressing that the accused, to be
guilty of estafa as charged, must have
used the check in order to defraud the
complainant. What the law punishes is
the fraud or deceit, not the mere
issuance of the worthless check. W could
not be held guilty of estafa simply
because he had issued the check used to
defraud a person. The proof of guilt must
still clearly show that it had been W as
the drawer who had defrauded a person
by means of the check. [People of the
Philippines v. Gilbert Reyes Wagas, G.R.
No. 157943, September 4, 2013]
2. A postdated check with the
date October 9, 2003 was
issued,
drawn
against
an
account
of
S
with
BPI,
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Commercial Law

presented for deposit with


ABank, on October 10, 2002.
Upon presentment, the check
was sent to the PCHC. It was
cleared by BPI and its amount
was debited from the account
of S, and credited to the
account of the payee. The
account of S was closed, but he
asked for the return of the
amount of the check, which BPI
agreed to. When BPI sent a
photocopy of the check to
ABank saying it was postdated,
ABank refused to accept it.
After the check was sent back
and forth between the two
banks, ABank filed a complaint
saying BPI should solely bear
the loss. Is ABank correct?
No. ABank and BPI should both bear the
loss by allocating the damage on a 60-40
ratio. In light of the contributory
negligence of BPI, it should bear 40% of
the loss, but ABank should bear 60%.
"Contributory negligence is conduct on
the part of the injured party, contributing
as a legal cause to the harm he has
suffered, which falls below the standard
to which he is required to conform for his
own protection." Admittedly, ABanks
acceptance of the subject check for
deposit despite the one year postdate
written on its face was a clear violation of
established banking regulations and
practices. In such instances, payment
should be refused by the drawee bank
and returned through the PCHC within the
24-hour reglementary period. Abanks
failure to comply with this basic policy
regarding post-dated checks was "a
telling sign of its lack of due diligence in
handling checks coursed through it." It
bears stressing that "the diligence
required of banks is more than that of a
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Roman paterfamilias or a good father of a


family. The highest degree of diligence is
expected," considering the nature of the
banking business that is imbued with
public interest. While it is true that
respondent's liability for its negligent
clearing of the check is greater, petitioner
cannot take lightly its own violation of the
long-standing rule against encashment of
post-dated checks and the injurious
consequences of allowing such checks
into the clearing system.
The antecedent negligence of the plaintiff
does not preclude him from recovering
damages caused by the supervening
negligence of the defendant, who had the
last fair chance to prevent the impending
harm by the exercise of due diligence.
Moreover, in situations where the
doctrine has been applied, it was
defendants failure to exercise such
ordinary care, having the last clear
chance to avoid loss or injury, which was
the proximate cause of the occurrence of
such loss or injury. If only BPI exercised
ordinary care in the clearing process, it
could have easily noticed the glaring
defect upon seeing the date written on
the face of the check "Oct. 9, 2003". BPI
could have then promptly returned the
check and with the check
thus
dishonored, ABank would have not
credited the amount thereof to the
payees account. Thus, notwithstanding
the antecedent negligence of the ABank
in accepting the post-dated check for
deposit, it can seek reimbursement from
BPI in the amount credited to the payees
account covering the check. [Allied
Banking Corporation v. Bank of the
Philippine Islands, GR No. 188363, 27
February 2013]

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Commercial Law

Corporation Law
1. What are the current rules on
principal
office
address
of
corporations and partnerships?
Previously,
the
SEC
had
allowed
corporations and partnerships to indicate
in their principal office address only the
name of the city, town, or municipality
where they conduct business, and
considered Metro Manila as a principal
office address. Thereafter, on 16 February
2006, the SEC issued Memorandum
Circular No. 3, series of 2006, directing
corporations and partnerships whose
articles of incorporation or partnership
still indicate a general address as their
principal office address, such as a city,
town or municipality, or Metro Manila,
to file, on or before 31 December 2014,
and amended articles of incorporation or
partnership, in order to specify their
complete addresses, such that it has a
street number, street name, barangay,
city or municipality, and if applicable, the
name of the building, the number of the
building, and the name or number of the
room or unit.
To ease the burden imposed on
corporations and partnership by SEC
Memorandum Circular No. 3, s. 2006, the
following guidelines should be observed
in the amendment of their articles in case
they transfer or move to another location:
1. In the event that a corporation
whose principal office address as
indicated in its articles is already
specific and complete, or fully
compliant with the Circulars, has
moved or moves to another
location within the same city or
municipality, the corporation is not
required to amend its articles. It
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2.

3.

4.

5.

must, however, declare its new or


current specific address in its
General Information Sheet (GIS)
within 15 days from transfer of its
transfer. For this purpose, Metro
Manila is no longer considered a
city or municipality.
A corporation, however, is not
precluded from filing an amended
articles to indicate its new location
within the same city or municipality
of its former address.
In other cases, the corporation
must file an amended articles of
incorporation to indicate its new
location
in
another
city
or
municipality.
In the case of a partnership,
considering that it has no obligation
to file a GIS, it is required to file an
amended articles of partnership
every time it transfers to a new
location within the same or another
city or municipality.
Failure of a corporation to do the
above will make it liable for
violation of Section 16 of the
Corporation Code and to the
payment of fines imposed by the
SEC.

[SEC Memorandum Circular No. 16,


series of 2013]
2. Can
stockholders
of
a
previously
dissolved
corporation, whose shares are
held in trust by another new
corporation, be considered as
individual subscribers of the
latter corporation?
Yes. A holder or stockholder includes a
person holding stocks in trust, and
trustees holding corporate stock are
regarded for all legal purposes as
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Commercial Law

stockholders. However, the rights of a


beneficial owner will, of course, be
recognized and protected in equity in
proper cases. In other words, even where
legal title to stock is vested in a certain
person, equity will treat him as a trustee
holding it for the real and beneficial
owners, in proper cases. Article 1455 of
the Civil Code provides that when any
trustee uses trust funds for the purchase
of property and causes the conveyance to
be made to him or a third person, a trust
is established by operation of law in favor
of the person to whom the funds belong.
Moreover, a trustee must not make
investments of funds in their own names
but always indicate that they are made in
trust capacities. Thus, the trustee merely
acts for the stockholders whose stocks
are held in trust, with the latter being the
owners thereof. thus, they are individual
subscribers of shares of stock. [SEC OGC
Opinion No. 13-09, 2 September 2013]
3. F jr. filed an action against AT, a
tabloid,
for
publishing
an
article which was alleged to be
libelous.
AT,
not
being
incorporated, argued that it
cannot be sued since it is not a
juridical person. Can AT be
sued?
AT can be sued for being a corporation by
estoppel. AT was a corporation by
estoppel as the result of its having
represented itself to the reading public as
a corporation despite its not being
incorporated. The non-incorporation of
AT with the Securities and Exchange
Commission was of no consequence, for,
otherwise, whoever of the public who
would suffer any damage from the
publication of articles in the pages of its
tabloids would be left without recourse.
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[Macasaet v. Francisco Co, Jr., G.R. No.


156759, June 5, 2013]
4. Can
previously
incurred
indebtedness
be
used
as
payment for subscription of
shares?
Yes. Section 62 of the Corporation Code
expressly allows a previously incurred
indebtedness to be used as consideration
for the issuance of stocks, provided that
the valuation of the indebtedness be
determined by the board of directors,
subject to approval of the SEC, in order to
prevent watering of stocks. Watering of
stocks is a situation wherein the
consideration for subscription is not a fair
valuation equal to the par or issue value
of the stock. The amount of the
indebtedness or liabilities to be settled
should be at least equal to the par value
of the shares of stock which the
corporation intends to issue. However,
there must first be an indebtedness
incurred in order that a liability may be
converted into subscription payment.
In
this
connection,
the
following
requirements are to be submitted to the
SEC:
1. Detailed schedule of liabilities being
offset, showing all debts and credit
to such liability account, date,
nature of account and amount.
2. Deed of assignment executed by
the
creditor(s]
assigning
the
amount due to him in payment for
the unpaid subscription(s].
3. Company's book of accounts must
be kept up to date and be made
available for examination by the
Commission to determine that the
liabilities
represent
valid
and
legitimate
claims
against
the
company.
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Commercial Law

4. If the principal office of the


corporation is located in the
province,
a
report
by
an
independent
certified
public
accountant must be submitted.
[SEC OGC Opinion No. 13-03, 17 April
2013; SEC Opinion, 2 October 1992; SEC
Opinion, 24 February 1988]
Such
payment
through
previously
incurred indebtedness does not violate
the stockholders preemptive rights, so
long the terms are on equal terms as with
the owners of the original stocks. A preemptive right under Section 39 of the
Corporation Code refers to the right of a
stockholder of a stock corporation to
subscribe to all issues or disposition of
shares of any class, in proportion to their
respective shareholdings, and on equal
terms with other holders of the original
stocks, before subscriptions are received
from the general public. Thus, if the
payments by other persons or entities are
in the form of conversion of the
previously incurred indebtedness, while
the payments of the other stockholders
for their subscriptions shall be in cash, it
is still considered to be on equal terms.
However, even when payment of the debt
is in terms required to be made by the
corporation in money or cash, a set-off of
the debt without going through this
unnecessary formality is equivalent to a
payment for the stock in cash. [SEC OGC
Opinion No. 13-03, 17 April 2013]
5. What shall be done when
properties requiring ownership
registration, such as land, are
used as paid-up capital of a
corporation?
Where payment is made in the form of
land, the corporation involved shall
submit to the SEC proof of the transfer of
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the certificate of ownership thereon, in


the name of the transferee corporation,
within 120 days from the date of approval
of the application filed therefor with the
SEC. Such period may be extended for
justifiable reasons. For properties other
than land, the proof of transfer of
registration shall be submitted to the SEC
within 90 days from approval of the
application by the SEC, which period may
also be extended for justifiable reasons.
[SEC Memorandum Circular No. 14, series
of 2013]
6. A, director and stockholder of
Corporation X, filed a complaint
for
intra-corporate
dispute
against the other directors and
stockholders
of
the
corporation.
The
complaint
arose when A sought to have
the real board of directors
rectify
entries
in
the
Corporations
General
Information Sheet (GIS) and
questioned the stockholders
meeting, and to allow him to
inspect the books of the
corporation, all of which were
not acted upon. Subsequently,
the corporation was dissolved
by revocation of its franchise.
Does the Complaint seek a
continuation of business or is it
a
settlement
of
corporate
affairs?
No. Section 122 of the Corporation Code
prohibits a dissolved corporation from
continuing its business, but allows it to
continue with a limited personality in
order to settle and close its affairs,
including its complete liquidation. Thus:
Sec.
122.
liquidation.
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Commercial Law

corporation whose charter


expires by its own limitation
or is annulled by forfeiture or
otherwise,
or
whose
corporate existence for other
purposes is terminated in any
other
manner,
shall
nevertheless be continued as
a body corporate for three (3)
years after the time when it
would
have
been
so
dissolved, for the purpose of
prosecuting and defending
suits by or against it and
enabling it to settle and close
its affairs, to dispose of and
convey its property and to
distribute its assets, but not
for the purpose of continuing
the business for which it was
established.
There is nothing in the prayers in the
complaint which shows any intention to
continue the corporate business of
Corporation X. The Complaint does not
seek to enter into contracts, issue new
stocks,
acquire
properties,
execute
business transactions, etc. Its aim is not
to continue the corporate business, but to
determine and vindicate an alleged
stockholders right to the return of his
stockholdings and to participate in the
election of directors, and a corporations
right to remove usurpers and strangers
from its affairs. There is nothing to show
that the resolution of these issues can be
said to continue the business of
Corporation X. [Vitaliano N. Aguirre II and
Fidel N. Aguirre II and Fidel N. Aguirre vs.
FQB+, Inc., Nathaniel D. Bocobo, Priscila
Bocobo and Antonio De Villa, G.R. No.
170770. January 9, 2013]

Corporate
Every
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In relation to Question Number 2,


will the dissolution render the
complaint moot and academic?
No. A corporations board of directors is
not rendered functus officio by its
dissolution. Since Section 122 allows a
corporation to continue its existence for a
limited purpose, necessarily there must
be a board that will continue acting for
and
on
behalf
of
the
dissolved
corporation for that purpose. In fact,
Section 122 authorizes the dissolved
corporations board of directors to
conduct its liquidation within three years
from its dissolution. Jurisprudence has
even recognized the boards authority to
act as trustee for persons in interest
beyond the said three-year period. Thus,
the determination of which group is the
bona fide or rightful board of the
dissolved corporation will still provide
practical relief to the parties involved.
[Ibid.]
7. Can a corporations dissolution
also bar a stockholder from
enforcing or vindicating his
property
right
to
his
shareholdings?
No. A partys stockholdings in a
corporation,
whether
existing
or
dissolved, is a property right which he
may vindicate against another party who
has
deprived
him
thereof.
The
corporations
dissolution
does
not
extinguish such property right. Section
145 of the Corporation Code ensures the
protection of this right, thus:
Sec. 145. Amendment or
repeal. No right or remedy
in favor of or against any
corporation, its stockholders,
members, directors, trustees,
or officers, nor any liability
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Commercial Law

incurred
by
any
such
corporation,
stockholders,
members, directors, trustees,
or officers, shall be removed
or impaired either by the
subsequent dissolution of
said corporation or by any
subsequent amendment or
repeal of this Code or of any
part thereof. [Ibid.]
8. B Corp. was dissolved through
an amendment of its articles of
incorporation shortening and
terminating its corporate life. It
was issued a SEC certificate of
dissolution, and during such
time, it had deposit accounts
with BPI which were assigned
to E Insurance to serve as
security
for
surety
bonds
issued by the latter to guaranty
monetary
claims
of
a
complainant in the labor case
filed against B Corp. with the
NLRC.
NLRC
ordered
the
release and cancellation of the
bonds because the case was
terminated. The certificates of
deposit covering the deposits
with BPI were surrendered by E
Insurance
to
the
former
director
and
corporate
secretary of B Corp. Who can
act
as
trustees
of
the
corporation even after the
expiration
of
the
3
year
winding-up period for its final
liquidation?
The counsel of B Corp. during the labor
case before the NLRC can be considered
as a trustee of the corporation as to
matters related to the labor case.
Likewise, the former director and
corporate secretary can also act as
trustee-in-liquidation of B Corp.
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A corporation can go beyond the threeyear period in Section 122 of the


Corporation Code to complete its
liquidation and to fully dispose of the
remaining corporate assets. If the threeyear period expires without a trustee
being appointed, the board of directors or
trustees itself, may be permitted to
continue as trustees by legal implication
to
complete
corporate
liquidation.
Likewise, counsel who prosecuted and
defended the corporation in a labor case,
when there was no trustee appointed,
and who in fact in behalf of the
corporation may be considered as a
trustee of the corporation at least with
respect to the matter in litigation only. As
to which of them is the proper trustee,
the SEC cannot determine that. Section
122 of the Corporation Code governing
corporate liquidation does not require
SEC approval for the distribution of the
corporate
assets
of
a
dissolved
corporation. The liquidation process is an
internal concern of the corporation and
falls within the power of the directors and
stockholders to determine. [SEC OGC
Opinion No. 14-02, 21 February 2014]
9. Bank A granted loans to
Corporation X, which were
secured by promissory notes
and mortgages over properties
owned by another corporation.
The transactions were entered
into
by
Corporation
Xs
president and General Manager.
Since Corporation X defaulted
in paying its loans, then the
mortgage was foreclosed and
eventually sold. Because there
was still remaining amount to
be paid, an action was filed
against
Corporation
X,
its
President, and the latters wife,
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Commercial Law

who signed a surety agreement


in favor of the bank, which the
lower court had declared as
falsified. Can the wife of the
President be held liable?
No. Basic is the rule in corporation law
that a corporation is a juridical entity
which is vested with a legal personality
separate and distinct from those acting
for and in its behalf and, in general, from
the people comprising it. Following this
principle, obligations incurred by the
corporation, acting through its directors,
officers and employees, are its sole
liabilities. A director, officer or employee
of a corporation is generally not held
personally liable for obligations incurred
by the corporation.24 Nevertheless, this
legal fiction may be disregarded if it is
used as a means to perpetrate fraud or
an illegal act, or as a vehicle for the
evasion of an existing obligation, the
circumvention of statutes, or to confuse
legitimate issues.25 This is consistent
with the provisions of the Corporation
Code of the Philippines, which states:
Sec. 31. Liability of directors,
trustees
or
officers.

Directors or trustees who


willfully and knowingly vote
for or assent to patently
unlawful
acts
of
the
corporation or who are guilty
of gross negligence or bad
faith in directing the affairs of
the corporation or acquire
any personal or pecuniary
interest in conflict with their
duty as such directors or
trustees shall be liable jointly
and severally for all damages
resulting therefrom suffered
by
the
corporation,
its

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stockholders or members and


other persons.

convincingly prove such unlawful acts,


negligence or bad faith.

Solidary liability will then attach to the


directors, officers or employees of the
corporation in certain circumstances,
such as:

In this case, it was not proven that the


wife of the president of Corporation X
committed an act of an officer of the said
corporation that would permit the
piercing of the corporate veil. A reading
of the complaint reveals that the Bank did
not demand that she be held liable for
the obligations of Hammer because she
was a corporate officer who committed
bad faith or gross negligence in the
performance of her duties such that the
lifting of the corporate mask would be
merited. What the complaint simply
stated is that she, together with her
errant husband acted as surety, as
evidenced by her signature on the Surety
Agreement which was later found by the
RTC to have been forged.

a. When directors and trustees or, in


appropriate cases, the officers of a
corporation: (1) vote for or assent
to patently unlawful acts of the
corporation; (2) act in bad faith or
with gross negligence in directing
the corporate affairs; and (3) are
guilty of conflict of interest to the
prejudice of the corporation, its
stockholders or members, and
other persons;
b. When a director or officer has
consented to the issuance of
watered stocks or who, having
knowledge
thereof,
did
not
forthwith file with the corporate
secretary his written objection
thereto;
c. When a director, trustee or officer
has
contractually
agreed
or
stipulated
to
hold
himself
personally and solidarily liable with
the corporation; or
d. When a director, trustee or officer is
made, by specific provision of law,
personally liable for his corporate
action.
Before a director or officer of a
corporation can be held personally liable
for corporate obligations, however, the
following requisites must concur: (1) the
complainant must allege in the complaint
that the director or officer assented to
patently unlawful acts of the corporation,
or that the officer was guilty of gross
negligence or bad faith; and (2) the
complainant
must
clearly
and
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Commercial Law

The piercing of the veil of corporate


fiction is frowned upon and can only be
done if it has been clearly established
that the separate and distinct personality
of the corporation is used to justify a
wrong, protect fraud, or perpetrate a
deception. Hence, any application of the
doctrine of piercing the corporate veil
should be done with caution. A court
should be mindful of the milieu where it is
to be applied. It must be certain that the
corporate fiction was misused to such an
extent that injustice, fraud, or crime was
committed against another, in disregard
of its rights. The wrongdoing must be
clearly and convincingly established; it
cannot be presumed. Otherwise, an
injustice that was never unintended may
result from an erroneous application.
[Heirs of Fe Tan Uy (Represented by her
heir, Manling Uy Lim) vs. International
Exchange Bank/Goldkey Development
Corporation vs. International Exchange
2013 & 2014 Q and A|

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Bank, G.R. No. 166282/G.R. No. 166283,


February 13, 2013.]
In relation to Question Number 5,
can the corporation, whose property
was mortgaged to secure the loans
of Corporation X, be held liable for
the said loans? Note that the two
corporations are owned by the same
family, sharing the same office
space, with their assets being comingled.
The
President
of
Corporation X is also the Chief
Operating Officer of the other
corporation involved.
Yes. Under a variation of the doctrine of
piercing the veil of corporate fiction,
when two business enterprises are
owned, conducted and controlled by the
same parties, both law and equity will,
when necessary to protect the rights of
third parties, disregard the legal fiction
that two corporations are distinct entities
and treat them as identical or one and
the same.
While the conditions for the disregard of
the juridical entity may vary, the
following are some probative factors of
identity that will justify the application of
the doctrine of piercing the corporate
veil, as laid down in Concept Builders,
Inc. v NLRC:
(1) Stock ownership by one or
common
ownership
of
both
corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate
books and records, and
(4) Methods of conducting the
business.
In this case, both corporations are family
corporations, who share the same office,
with the same set of officers, and their
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Commercial Law

assets are co-mingled. Likewise, when


the President of Corporation X went
missing, the other corporation ceased its
operations. Based on these, it is apparent
that the said corporation was merely an
adjunct of Corporation X and, as such, the
legal fiction that it has a separate
personality from that of Hammer should
be brushed aside as they are, undeniably,
one and the same. [Ibid.]
10.
Spouses F entered into a
contract to sell with G Corp,
covering a parcel of land, in G
Corps subdivision. Spouses F
full paid the purchase price,
but G Corp. failed to execute
the deed of sale and deliver the
title to the spouses. Thus, the
spouses filed an action for
specific
performance
or
rescission against G Corp and
its Board of Directors. Can the
Board of Directors be held
liable?
No. There is no basis to hold the
members of the board solidarily liable
with G Corp for the payment of damages
in favor of Sps. F since it was not shown
that they acted maliciously or dealt with
the latter in bad faith. Settled 1s the rule
that in the absence of malice and bad
faith, as in this case, officers of the
corporation cannot be made personally
liable for liabilities of the corporation
which, by legal fiction, has a personality
separate and distinct from its officers,
stockholders, and members. [Gotesco
Properties, Inc. v. SpousesFajardo, G.R.
No. 201167, 27 February 2013]
11.
DBP and PNB foreclosed
mortgages on the properties of
MMIC, a corporation. As a
result,
they
acquired
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substantially all the assets of


NMIC and resumed its business
operations. NMIC engaged the
services of H Corporation for
which it paid the latter. But,
NMIC still had an unpaid
balance of around 8 million
pesos. Can DBP and PNB be
held liable for such amount?
No. A corporation is an artificial entity
created by operation of law. It possesses
the right of succession and such powers,
attributes, and properties expressly
authorized by law or incident to its
existence. It has a personality separate
and distinct from that of its stockholders
and from that of other corporations to
which it may be connected. As a
consequence of its status as a distinct
legal entity and as a result of a conscious
policy decision to promote capital
formation, a corporation incurs its own
liabilities and is legally responsible for
payment of its obligations. In other
words, by virtue of the separate juridical
personality
of
a
corporation,
the
corporate debt or credit is not the debt or
credit of the stockholder. This protection
from liability for shareholders is the
principle of limited liability.
Equally well-settled is the principle that
the corporate mask may be removed or
the corporate veil pierced when the
corporation is just an alter ego of a
person or of another corporation. For
reasons of public policy and in the
interest of justice, the corporate veil will
justifiably be impaled only when it
becomes a shield for fraud, illegality or
inequity committed against third persons.
However, the rule is that a court should
be careful in assessing the milieu where
the doctrine of the corporate veil may be
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Commercial Law

applied. Otherwise an injustice, although


unintended, may result from its erroneous
application. Thus, cutting through the
corporate cover requires an approach
characterized by due care and caution:
Hence, any application of the doctrine of
piercing the corporate veil should be
done with caution. A court should be
mindful of the milieu where it is to be
applied. It must be certain that the
corporate fiction was misused to such an
extent that injustice, fraud, or crime was
committed against another, in disregard
of its rights. The wrongdoing must be
clearly and convincingly established; it
cannot be presumed.
Sarona v. National Labor Relations
Commission has defined the scope of
application of the doctrine of piercing the
corporate veil:
The doctrine of piercing the corporate veil
applies only in three (3) basic areas,
namely: 1) defeat of public convenience
as when the corporate fiction is used as a
vehicle for the evasion of an existing
obligation; 2) fraud cases or when the
corporate entity is used to justify a
wrong, protect fraud, or defend a crime;
or 3) alter ego cases, where a corporation
is merely a farce since it is a mere alter
ego or business conduit of a person, or
where the corporation is so organized and
controlled and its affairs are so conducted
as to make it merely an instrumentality,
agency, conduit or adjunct of another
corporation.
In this connection, case law lays down a
three-pronged test to determine the
application of the alter ego theory, which
is also known as the instrumentality
theory, namely:

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(1) Control, not mere majority or


complete
stock
control,
but
complete domination, not only of
finances but of policy and business
practice
in
respect
to
the
transaction attacked so that the
corporate
entity
as
to
this
transaction had at the time no
separate mind, will or existence of
its own;
(2) Such control must have been
used by the defendant to commit
fraud or wrong, to perpetuate the
violation of a statutory or other
positive legal duty, or dishonest
and unjust act in contravention of
plaintiffs legal right; and
(3) The aforesaid control and
breach
of
duty
must
have
proximately caused the injury or
unjust loss complained of.
The first prong is the "instrumentality"
or "control" test. This test requires that
the subsidiary be completely under the
control and domination of the parent. It
examines
the
parent
corporations
relationship
with
the
subsidiary. It
inquires whether a subsidiary corporation
is so organized and controlled and its
affairs are so conducted as to make it a
mere instrumentality or agent of the
parent corporation such that its separate
existence as a distinct corporate entity
will be ignored. It seeks to establish
whether the subsidiary corporation has
no autonomy and the parent corporation,
though acting through the subsidiary in
form and appearance, "is operating the
business directly for itself."
The second prong is the "fraud" test.
This test requires that the parent
corporations conduct in using the
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Commercial Law

subsidiary
corporation
be
unjust,
fraudulent or wrongful. It examines the
relationship of the plaintiff to the
corporation. It recognizes that piercing is
appropriate only if the parent corporation
uses the subsidiary in a way that harms
the plaintiff creditor. As such, it requires a
showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This
test requires the plaintiff to show that the
defendants
control,
exerted
in
a
fraudulent, illegal or otherwise unfair
manner toward it, caused the harm
suffered. A causal connection between
the
fraudulent
conduct
committed
through the instrumentality of the
subsidiary and the injury suffered or the
damage incurred by the plaintiff should
be established. The plaintiff must prove
that, unless the corporate veil is pierced,
it will have been treated unjustly by the
defendants exercise of control and
improper use of the corporate form and,
thereby, suffer damages.
To summarize, piercing the corporate veil
based on the alter ego theory requires
the concurrence of three elements:
control of the corporation by the
stockholder or parent corporation, fraud
or fundamental unfairness imposed on
the plaintiff, and harm or damage caused
to the plaintiff by the fraudulent or unfair
act of the corporation. The absence of
any of these elements prevents piercing
the corporate veil.
In applying the alter ego doctrine, the
courts are concerned with reality and not
form, with how the corporation operated
and
the
individual
defendants
relationship to that operation. With
respect to the control element, it refers
not to paper or formal control by majority
2013 & 2014 Q and A|

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or even complete stock control but actual


control
which
amounts
to
"such
domination of finances, policies and
practices that the controlled corporation
has, so to speak, no separate mind, will
or existence of its own, and is but a
conduit for its principal." In addition, the
control must be shown to have been
exercised at the time the acts complained
of took place.
While ownership by one corporation of all
or a great majority of stocks of another
corporation
and
their
interlocking
directorates may serve as indicia of
control, by themselves and without more,
however,
these
circumstances
are
insufficient to establish an alter ego
relationship or connection between DBP
and PNB on the one hand and NMIC on
the other hand, that will justify the
puncturing of the latters corporate cover.
"Mere ownership by a single stockholder
or by another corporation of all or nearly
all of the capital stock of a corporation is
not of itself sufficient ground for
disregarding the separate corporate
personality." Likewise, the "existence of
interlocking directors, corporate officers
and
shareholders
is
not
enough
justification to pierce the veil of corporate
fiction in the absence of fraud or other
public
policy
considerations."
[Phil.
National Bank vs. Hydro Resources
Contractors Corp., .G.R. Nos. 167530,
167561, 16760311. March 13, 2013]
12.
M
filed
a
complaint
against
the
Cuencas
for
collection of sum of money, for
which the court issued a writ of
preliminary attachment, with M
posting a bond issued by S
Insurance. The properties of A
C Inc. were levied upon in the
execution of the writ. The
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Commercial Law

Cuencas sought to quash the


writ alleging that (1) the action
involved
intra-corporate
matters that were within the
original
and
exclusive
jurisdiction of the Securities
and
Exchange
Commission
(SEC); and (2) there was
another action pending in the
SEC as well as a criminal
complaint in the Office of the
City Prosecutor of Paraaque
City. This was denied by the CA.
Thus, the Cuencas filed an
action for damages against the
S Insurance as a result of the
wrongful attachment. Can the
action prosper?
No. The complaint of the Cuencas lacks a
cause of action. It is true that the
Cuencas could bring in behalf of AC Inc. a
proper action to recover damages
resulting from the attachment, however,
such action would be one directly brought
in the name of the corporation. In the
instant case, the Cuencas presented the
claim in their own names. The Cuencas
were only stockholders of AC Inc., which
had a personality distinct and separate
from that of any or all of them. The
damages occasioned to the properties by
the levy on attachment, wrongful or not,
prejudiced AC Inc., not them. As such,
only AC Inc. had the right under the
substantive law to claim and recover such
damages. This right could not also be
asserted by the Cuencas unless they did
so in the name of the corporation itself.
But that did not happen herein, because
AC Inc. was not even joined in the action
either as an original party or as an
intervenor. The Cuencas were clearly not
vested with any direct interest in the
personal properties coming under the
levy on attachment by virtue alone of
2013 & 2014 Q and A|

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their being stockholders in AC Inc. Their


stockholdings represented only their
proportionate or aliquot interest in the
properties of the corporation, but did not
vest in them any legal right or title to any
specific properties of the corporation.
Without doubt, AC Inc. remained the
owner as a distinct legal person.
[Stronghold Insurance v. Cuenca, G.R. No.
173297, March 6, 2013]
13.
SMP
Corp
paid
local
business taxes to the city of
Manila, but they wrote a letter
to the latter claiming a refund
of the amount paid on the
ground of double taxation. The
letter was not acted upon, thus
SMP filed and action in the RTC
for
refund
of
taxes.
The
verification and certification of
forum shopping attached to the
petition filed by SMP was
signed by B, but there was no
secretarys certificate to show
her authority to file the action
on behalf of SMP. Can B file the
case on behalf of SMP?
No. The power of a corporation to sue and
be sued is lodged in the board of
directors, which exercises its corporate
powers. It necessarily follows that an
individual corporate officer cannot solely
exercise any corporate power pertaining
to the corporation without authority from
the board of directors. Thus, physical
acts of the corporation, like the signing of
documents, can be performed only by
natural persons duly authorized for the
purpose by corporate by-laws or by a
specific act of the board of directors.
Consequently, a verification signed
without an authority from the board of
directors is defective. However, the act of
B in filing the action may be ratified by a
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Commercial Law

subsequent board resolution passed by


the
corporation.
[Swedish
Match
Philippines v. Treasurer of the City of
Manila, G.R. No. 181277, 3 July 2013]
14.
H Corp. filed a petition for
certiorari
against
the
Esguerras, but they did not
secure and/or attach a certified
true copy of a board resolution
authorizing any of its officers to
file
said
petition,
but
it
attached
a
secretarys
certificate. Should the case be
dismissed?
No. The general rule is that a corporation
can only exercise its powers and transact
its business through its board of directors
and through its officers and agents when
authorized by a board resolution or its
bylaws. The power of a corporation to sue
and be sued is exercised by the board of
directors. The physical acts of the
corporation,
like
the
signing
of
documents, can be performed only by
natural persons duly authorized for the
purpose by corporate bylaws or by a
specific act of the board. Absent the said
board resolution, a petition may not be
given due course. H Corp attached all the
necessary documents for the filing of a
petition for certiorari before the court.
While the board resolution may not have
been attached, H Corp complied just the
same when it attached the Secretarys
Certificate,
thus
proving
that
its
representative had the authority from the
board of directors to appoint the counsel
to represent them in the case. [Esguerra
v. Holcim Philippines, Inc., G.R. No.
182571, 2 September 2013
15.
SMBI is a family owned
and run corporation. One of the
family members agreed to loan
2013 & 2014 Q and A|

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money to SMBI and other


corporations owned by the
same family to settle the
corporate obligations. A check
was thus issued in the name of
the family members. SMBI
thereafter increased its capital
stock. Thereafter, a series of
events transpired, which lead
one of the stockholders to file a
derivative suit, claiming he has
been illegally excluded from
management and participation
in the business of SMBI and
that
some
of
the
family
members refuse to settle their
obligations
with
the
corporation. Is the complaint a
derivative suit?
No. A derivative suit is an action brought
by a stockholder on behalf of the
corporation to enforce corporate rights
against
the
corporations
directors,
officers or other insiders. Under Sections
23 and 36 of the Corporation Code, the
directors or officers, as provided under
the by-laws, have the right to decide
whether or not a corporation should sue.
Since these directors or officers will never
be willing to sue themselves, or impugn
their wrongful or fraudulent decisions,
stockholders are permitted by law to
bring an action in the name of the
corporation to hold these directors and
officers accountable. In derivative suits,
the real party in interest is the
corporation, while the stockholder is a
mere nominal party.
The Court, in Yu v. Yukayguan, explained:
The Court has recognized that a
stockholders
right
to
institute
a
derivative suit is not based on any
express provision of the Corporation
Starr Weigand 2014
Commercial Law

Code, or even the Securities Regulation


Code, but is impliedly recognized when
the said laws make corporate directors or
officers liable for damages suffered by
the corporation and its stockholders for
violation of their fiduciary duties. Hence,
a
stockholder
may
sue
for
mismanagement, waste or dissipation of
corporate assets because of a special
injury to him for which he is otherwise
without redress. In effect, the suit is an
action for specific performance of an
obligation owed by the corporation to the
stockholders to assist its rights of action
when the corporation has been put in
default by the wrongful refusal of the
directors or management to make
suitable measures for its protection. The
basis of a stockholders suit is always one
in equity. However, it cannot prosper
without first complying with the legal
requisites for its institution.
Section 1, Rule 8 of the Interim Rules
imposes the following requirements for
derivative suits:
(1)The person filing the suit must be a
stockholder or member at the time
the acts or transactions subject of
the action occurred and the time
the action was filed;
(2)He
must
have
exerted
all
reasonable efforts, and alleges the
same with particularity in the
complaint, to exhaust all remedies
available under the articles of
incorporation, by-laws, laws or rules
governing
the
corporation
or
partnership to obtain the relief he
desires;
(3)No appraisal rights are available for
the act or acts complained of; and
(4)The suit is not a nuisance or
harassment suit.

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Applying the foregoing, the Complaint is


not a derivative suit. The Complaint failed
to show how the acts of some of the
family
members
resulted
in
any
detriment to SMBI. The loan was not a
corporate obligation, but a personal debt.
The check was issued to specific persons
and not SMBI. The proceeds of the loan
were used for payment of the obligations
of the other corporations owned by the
family as well as the purchase of real
properties for the brothers. SMBI was
never named as a co-debtor or guarantor
of the loan. Both loan instruments were
executed by two of the family members
in their personal capacity, and not in their
capacity as directors or officers of SMBI.
Thus, SMBI is under no legal obligation to
satisfy the obligation.
The fact that the family members
attempted to constitute a mortgage over
"their" share in a corporate asset cannot
affect SMBI. The Civil Code provides that
in order for a mortgage to be valid, the
mortgagor must be the "absolute owner
of the thing x x x mortgaged." Corporate
assets may be mortgaged by authorized
directors or officers on behalf of the
corporation as owner, "as the transaction
of the lawful business of the corporation
may reasonably and necessarily require."
However, the wording of the Mortgage
reveals that it was signed by two of the
family members in their personal
capacity as the "owners" of a pro-indiviso
share in SMBIs land and not on behalf of
SMBI. [Juanito Ang, for and in behalf of
Sunrise Marketing (Bacolod), Inc. v. Sps.
Roberto and Rachel Ang, G.R. No.
201675, June 19, 2013]
16.
FEGDI
is
a
stock
corporation
involved
in
developing golf courses, while
FELI is engaged in real estate
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Commercial Law

development. FEGDI obtained


shares of stock in one of FELIs
projects as a result of its
financing
support
and
construction efforts. It sold
some of its shares to RSACC,
which the latter later sold to
VST.
However,
the
shares
remained under the name of
FEGDI. Can VST be considered
as owner of the shares of
stock?
No. In a sale of shares of stock, physical
delivery of a stock certificate is one of the
essential requisites for the transfer of
ownership of the stocks purchased. Here,
FEGDI clearly failed to deliver the stock
certificates, representing the shares of
stock purchased by Vertex, within
a
reasonable time from the point the shares
should have been delivered. This was a
substantial breach of their contract that
entitles VST the right to rescind the sale
under Article 1191 of the Civil Code. It is
not entirely correct to say that a sale had
already been consummated as VST
already enjoyed the rights a shareholder
can exercise. The enjoyment of these
rights cannot suffice where the law, by its
express terms, requires a specific form to
transfer ownership. [Fil-Estate Gold and
Development, Inc., et al. v. Vertex Sales
and Trading, Inc., G.R. No. 202079, June
10, 2013]
17.
AP
is
a
domestic
corporation with G as its
President, and C, the latters
wife, as its General Manager. AT
is also a Domestic corporation,
with T as its President and U as
its treasurer. AT purchased
notebooks from AP on credit.
Loans were also obtained by AT
from
AP
upon
the
2013 & 2014 Q and A|

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representation of T and U. To
pay for its purchases, AT gave
AP 82 postdated checks signed
T and U. the check were
dishonored for having been
drawn
against
insufficient
funds.
A
complaint
for
collection of sum of money was
filed AT, U, T, and its other
officers. Can AT be held liable?
Yes. The acts of T and U clearly bound the
corporation, and thus, it could be made
liable therefor under the doctrine of
apparent authority. The doctrine of
apparent authority provides that a
corporation will be estopped from
denying the agents authority if it
knowingly permits one of its officers or
any other agent to act within the scope of
an apparent authority, and it holds him
out to the public as possessing the power
to do those acts.
The doctrine of
apparent authority does not apply if the
principal did not commit any acts or
conduct which a third party knew and
relied upon in good faith as a result of the
exercise
of
reasonable
prudence.
Moreover, the agents acts or conduct
must have produced a change of position
to the third partys detriment.
Under Section 23 of the Corporation
Code, the power and responsibility to
decide whether the corporation should
enter into a contract that will bind the
corporation is lodged in the board,
subject to the articles of incorporation,
bylaws, or relevant provisions of law.
However, just as a natural person who
may authorize another to do certain acts
for and on his behalf, the board of
directors may validly delegate some of its
functions
and
powers
to
officers,
committees or agents. The authority of
such individuals to bind the corporation is
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Commercial Law

generally derived from law, corporate


bylaws or authorization from the board,
either expressly or impliedly by habit,
custom or acquiescence in the general
course of business, viz.:
A corporate officer or agent may
represent and bind the corporation in
transactions with third persons to the
extent that [the] authority to do so has
been conferred upon him, and this
includes powers as, in the usual course of
the particular business, are incidental to,
or may be implied from, the powers
intentionally conferred, powers added by
custom and usage, as usually pertaining
to the particular officer or agent, and
such apparent powers as the corporation
has caused person dealing with the
officer or agent to believe that it has
conferred.
[A]pparent authority is derived not
merely from practice. Its existence may
be ascertained through (1) the general
manner in which the corporation holds
out an officer or agent as having the
power to act or, in other words the
apparent authority to act in general, with
which it clothes him; or (2) the
acquiescence in his acts of a particular
nature, with actual or constructive
knowledge thereof, within or beyond the
scope of his ordinary powers. It requires
presentation of evidence of similar act(s)
executed either in its favor or in favor of
other parties. It is not the quantity of
similar acts which establishes apparent
authority, but the vesting of a corporate
officer with the power to bind the
corporation.
In Peoples Aircargo and Warehousing
Co., Inc. v. Court of Appeals, the Court
ruled that the doctrine of apparent
authority is applied when the petitioner,
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through its president Antonio Punsalan Jr.,


entered into the First Contract without
first securing board approval. Despite
such lack of board approval, petitioner
did not object to or repudiate said
contract, thus clothing its president
with the power to bind the corporation.
Inasmuch as a corporate president is
often given general supervision and
control over corporate operations, the
strict rule that said officer has no inherent
power to act for the corporation is slowly
giving way to the realization that such
officer has certain limited powers in the
transaction of the usual and ordinary
business of the corporation.
In the absence of a charter or bylaw
provision to the contrary, the president is
presumed to have the authority to act
within the domain of the general
objectives of its business and within the
scope of his or her usual duties. [Advance
Paper Corporation and George Haw, in his
capacity as President of Advance Paper
Corporation v. Arma Traders Corporation,
Manuel Ting, et al., G.R. No. 176897,
December 11, 2013]
18.
L filed a complaint for
recovery of ownership of land
against R, alleging that the
latter encroached on a quarter
of her property by arbitrarily
extending his concrete fence
beyond the correct limits. R
alleged that this was the fault
of OLFI, a corporation, after the
latter trimmed his property for
the
construction
of
the
subdivision road. He thus filed
a third party complaint against
OLFI. Acting on the third party
complaint, the court ordered
OLFI to reimburse R, and issued
a writ of execution. The sheriff
Starr Weigand 2014
Commercial Law

then proceeded to garnish the


accounts
of
the
general
manager of OLFI in UCPB. Can
the funds of the general
manager
be
garnished
to
satisfy the judgment against
OLFI?
No. In order to hold the general manager
personally liable alone for the debts of
the corporation and thus pierce the veil of
corporate fiction, it is required that the
bad faith of the officer must first be
established clearly and convincingly.
However, there is nothing to indicate any
wrongdoing of the general manager.
Necessarily, it would be unjust to hold the
latter personally liable. Any piercing of
the corporate veil has to be done with
caution. There is no evidence that would
prove OLFI's status as a dummy
corporation. A court should be mindful of
the milieu where it is to be applied. It
must be certain that the corporate fiction
was misused to such an extent that
injustice, fraud, or crime was committed
against another, in disregard of rights.
The wrongdoing must be clearly and
convincingly established; it cannot be
presumed. Otherwise, an injustice that
was never unintended may result from an
erroneous application. [Roxas v. Our
Ladys Foundation, Inc., G.R. No. 182378,
6 March 2013]
19.
P granted loans to NSI. On
the part of NSI, the loan
agreement between the two
parties was signed by its
president, N. Payments were
made by N, however, NSI still
defaulted on its loan obligation
to P, for which the latter filed a
collection suit against N and
NSI. Can N be held jointly and

2013 & 2014 Q and A|

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severally liable for


obligation of NSI?

the

loan

No. The rule is settled that a corporation


is vested by law with a personality
separate and distinct from the persons
composing it. Following this principle, a
stockholder, generally, is not answerable
for the acts or liabilities of the
corporation,
and
vice
versa.
The
obligations incurred by the corporate
officers, or other persons acting as
corporate
agents,
are
the
direct
accountabilities of the corporation they
represent, and not theirs. A director,
officer or employee of a corporation is
generally not held personally liable for
obligations incurred by the corporation9
and while there may be instances where
solidary liabilities may arise, these
circumstances are exceptional.
Mere ownership by a single stockholder
or by another corporation of all or nearly
all of the capital stocks of the corporation
is not, by itself, a sufficient ground for
disregarding the separate corporate
personality. Other than mere ownership
of capital stocks, circumstances showing
that the corporation is being used to
commit fraud or proof of existence of
absolute control over the corporation
have to be proven. In short, before the
corporate fiction can be disregarded,
alter-ego
elements
must
first
be
sufficiently established. The mere fact
that it was N who, in behalf of the
corporation, signed the loan agreement is
not sufficient to prove that he exercised
control over the corporations finances.
Neither the absence of a board resolution
authorizing him to contract the loan nor
NSIs failure to object thereto supports
this conclusion. These may be indicators
that, among others, may point the proof
required to justify the piercing the veil of
Starr Weigand 2014
Commercial Law

corporate fiction, but by themselves, they


do not rise to the level of proof required
to support the desired conclusion. It
should be noted in this regard that while
N was the signatory of the loan and the
money was delivered to him, the
proceeds of the loan were unquestionably
intended for NSIs proposed business
plan. There is no sufficient evidence in
the instant case to justify a piercing, in
the absence of proof that the business
plan was a fraudulent scheme geared to
secure funds from the respondent for the
petitioners undisclosed goals. [Saverio v.
Puyat, G.R. No. 186433, November 27,
2013]
20.
PTA is a GOCC which
administers tourism zones. It
allowed PTC Cooperative to
operate a restaurant business
in one of its main buildings, but
in 1993, its CALABARZON area
manager notified the latter to
cease its operations as a result
of the rehabilitation of its
tourism complex. Thus, PTC
Cooperative filed an action in
court to stop PTA from evicting
and preventing it from carrying
out the restaurant business in
the main building of PTA. Can
the area manager be held
liable?
No. As a general rule the officer cannot
be held personally liable with the
corporation, whether civilly or otherwise,
for the consequences of his acts, if acted
for and in behalf of the corporation,
within the scope of his authority and in
good faith. [Rodolfo Laborte, et al. v.
Pagsanjan
Tourism
Consumers
Cooperative, et al., G.R. No. 183860,
January 15, 2014]

2013 & 2014 Q and A|

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21.
C was a salesman of A,
engaged in the selling of
broadcasting equipment. When
A created B Corp. C was made
an Assistant Vice President
(AVP) for sales, while AA was
then appointed as VP for sales.
C
accused
AA
of
several
irregularities which were made
the subject of a memo sent to
A. Allegedly, C was asked by A
to tender his resignation, to
which he refused. He received a
memo, signed by A, charging
him with serious misconduct
and willful breach of trust. He
was later on barred from
entering company premises,
and allegedly suspended. Thus,
he filed a complaint for illegal
dismissal before the NLRC
against B Corp. and A. Does the
labor arbiter of the NLRC have
jurisdiction?

of the corporation and the officer is


elected by the directors and stockholders.
On the other hand, an "employee" usually
occupies no office and generally is
employed not by action of the directors or
stockholders but by the managing officer
of the corporation who also determines
the compensation to be paid to such
employee.

Yes. C, although an officer of B Corp. for


being its AVP for Sales, was not a
"corporate officer" as the term is defined
by law. Corporate officers in the context
of Presidential Decree No. 902-A are
those officers of the corporation who are
given that character by the Corporation
Code or by the corporations by-laws.
There are three specific officers whom a
corporation must have under Section 25
of the Corporation Code. These are the
president, secretary and the treasurer.
The number of officers is not limited to
these three. A corporation may have such
other officers as may be provided for by
its by-laws like, but not limited to, the
vice-president, cashier, auditor or general
manager. The number of corporate
officers is thus limited by law and by the
corporations by-laws." It has been held
that an "office" is created by the charter

Under B Corp.s By-laws only provide the


following as corporate officers: the
President, Vice-President, Treasurer and
Secretary. Although a blanket authority
provides for the Boards appointment of
such other officers as it may deem
necessary and proper, the respondents
failed to sufficiently establish that the
position of AVP for Sales was created by
virtue of an act of B Corps board, and
that C was specifically elected or
appointed to such position by the
directors. No board resolutions to
establish such facts form part of the case
records.

Starr Weigand 2014


Commercial Law

As may be deduced from the foregoing,


there are two circumstances which must
concur in order for an individual to be
considered a corporate officer, as against
an ordinary employee or officer, namely:
(1) the creation of the position is under
the corporations charter or by-laws; and
(2) the election of the officer is by the
directors or stockholders. It is only when
the officer claiming to have been illegally
dismissed is classified as such corporate
officer that the issue is deemed an intracorporate dispute which falls within the
jurisdiction of the trial courts.

Also,
an
enabling
clause
in
a
corporations by-laws empowering its
board of directors to create additional
officers, even with the subsequent
passage of a board resolution to that
2013 & 2014 Q and A|

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effect, cannot make such position a


corporate office. The board of directors
has no power to create other corporate
offices without first amending the
corporate by-laws so as to include therein
the newly created corporate office. "To
allow the creation of a corporate officer
position by a simple inclusion in the
corporate by-laws of an enabling clause
empowering the board of directors to do
so can result in the circumvention of that
constitutionally well-protected right [of
every employee to security of tenure]."
Likewise, the mere fact that C was a
stockholder of B Corp. at the time of the
cases filing did not necessarily make the
action an intra- corporate controversy.
"Not
all
conflicts
between
the
stockholders and the corporation are
classified as intra-corporate. There are
other facts to consider in determining
whether the dispute involves corporate
matters as to consider them as intracorporate controversies." In determining
the existence of an intra-corporate
dispute, the status or relationship of the
parties and the nature of the question
that is the subject of the controversy
must be taken into account.
An intra-corporate controversy, which
falls within the jurisdiction of regular
courts, has been regarded in its broad
sense to pertain to disputes that involve
any of the following relationships: (1)
between the corporation, partnership or
association and the public; (2) between
the
corporation,
partnership
or
association and the state in so far as its
franchise, permit or license to operate is
concerned; (3) between the corporation,
partnership or association and its
stockholders, partners, members or
officers; and (4) among the stockholders,
partners or associates, themselves.
Starr Weigand 2014
Commercial Law

Settled jurisprudence, however, qualifies


that when the dispute involves a charge
of illegal dismissal, the action may fall
under the jurisdiction of the LAs upon
whose jurisdiction, as a rule, falls
termination disputes and claims for
damages
arising
from
employeremployee relations as provided in Article
217 of the Labor Code.
Considering that the pending dispute
particularly relates to Cs rights and
obligations as a regular officer of B Corp.,
instead of as a stockholder of the
corporation, the controversy cannot be
deemed
intra-corporate.
This
is
consistent with the "controversy test",
which provides that the incidents of that
relationship must also be considered for
the purpose of ascertaining whether the
controversy itself is intra-corporate. The
controversy must not only be rooted in
the existence of an intra-corporate
relationship, but must as well pertain to
the
enforcement
of
the
parties
correlative rights and obligations under
the Corporation Code and the internal
and intra-corporate regulatory rules of
the corporation. If the relationship and its
incidents are merely incidental to the
controversy or if there will still be conflict
even if the relationship does not exist,
then no intra-corporate controversy
exists. [Raul C. Cosare v. Broadcom Asia,
Inc., et al., G.R. No. 201298, February 5,
2014]
22.
The janitors and their
supervisors of the maintenance
department of PCCr, a nonstock educational institution,
were
dismissed
from
employment as a result of the
termination of the contract
PCCr had with their agency. The
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contract was terminated as a


result of the discovery of the
revocation of the certificate of
incorporation of the agency.
The said dismissed employees
executed
quitclaims
and
waivers in favor of the agency,
which was already dissolved.
Can
the
janitors
and
supervisors hold its agency
liable even if it had already
been
dissolved?
Are
the
quitclaims and waivers valid
even if executed 6 years after
dissolution?
Yes. The revocation does not result in the
termination of its liabilities. Section 122
of the Corporation Code provides for a
three-year winding up period for a
corporation whose charter is annulled by
forfeiture or otherwise to continue as a
body corporate for the purpose, among
others, of settling and closing its affairs.
Even if said documents six (6) years after
the dissolution, the same are still valid
and binding upon the parties and the
dissolution will not terminate the
liabilities incurred by the dissolved
corporation pursuant to Sections 122 and
145 of the Corporation Code. A
corporation is allowed to settle and close
its affairs even after the winding up
period of three (3) years.
Section 145 of the Corporation Code
clearly provides that "no right or remedy
in favor of or against any corporation, its
stockholders,
members,
directors,
trustees, or officers, nor any liability
incurred by any such corporation,
stockholders,
members,
directors,
trustees, or officers, shall be removed or
impaired either by the subsequent
dissolution of said corporation." Even if
Starr Weigand 2014
Commercial Law

no trustee is appointed or designated


during the three-year period of the
liquidation of the corporation, it has been
held that the board of directors may be
permitted to complete the corporate
liquidation by continuing as "trustees" by
legal implication. [Vigilla v. College of
Criminology, G.R. No. 200094, June 10,
2013]
23.
What can be done in case
the board refuses to recognize
the legitimacy of newly elected
board members?
An outgoing President or the Board which
refuses to recognize the legitimacy of
those newly-elected and who continue to
exercise their functions may be the
subjects of an intra-corporate case filed
with the regular courts. [SEC OGC
Opinion No. 14-09, 2 June 2014]
24.
What
constitutes
a
quorum
for
purposes
of
election of directors or trustees
of a corporation?
Section 24 of the Corporation requires the
presence in person or by proxy of the
owners of a majority of the outstanding
capital stock, or if there be no capital
stock, a majority of the members entitled
to vote. This section governs since it is
the provision which is specifically
applicable to quorum of election of
directors or trustees. The phrase entitled
to vote should be interpreted to apply to
both stock and non-stock corporations.
This does not include shares under
litigation. However, not all shares under
litigation cannot vote. For example, stock
owned by the estate of a decedent may
be voted by the estates executor or
administrator. If there is no executor or
administrator, then the shares of a
2013 & 2014 Q and A|

- 24 -

decedent cannot be voted. Also, if there


is a dispute as to who owns the shares,
and thus, who has the right to vote such
shares, then the general rule is that the
registered owner of the shares of the
corporation exercises the right and the
privilege of voting. [SEC-OGC Opinion
No. 13-11, 20 November 2013]
25.
Does cumulative voting
apply to election of trustees of
a
non-stock
condominium
corporation?
The general rule for the election of
trustees of a non-stock corporation is that
members may cast as many votes as
there are trustees to be elected but may
cast only one vote per candidate. By way
of exception, a non-stock corporation
may adopt other modes of casting votes,
including, but not limited to, cumulative
voting, if the same is authorized in its
articles or by-laws, or the master deed or
the declaration of restrictions (in case of
a non-stock condominium corporation).
otherwise, the general rule that members
may not cast more than one vote for any
candidate will apply. [SEC OGC Opinion
No. 14-10, 2 June 2014]
26.
What
voting?

is

cumulative

Cumulative voting is a mode of casting


votes during the elections of directors in
a stock corporation. this is in line with
Section 24 of the Corporation Code,
which provides that every stockholder
entitled to vote shall have the right to
vote in person or by proxy the number of
shares of stock standing, at the time fixed
in the by-laws, in his own name on the
stock books of the corporation, or where
the by-laws are silent, at the time of the
election; and said stockholder may vote
Starr Weigand 2014
Commercial Law

such number of shares for as many


persons as there are directors to be
elected or he may cumulate said shares
and give one candidate as many votes as
the number of directors to be elected
multiplied by the number of his shares
shall equal, or he may distribute them on
the same principle among as many
candidates as he shall see fit: Provided,
That the total number of votes cast by
him shall not exceed the number of
shares owned by him as shown in the
books of the corporation multiplied by the
whole number of directors to be elected.
Under this provision, there are two
methods
of
cumulative
voting:
Cumulative voting for one candidate, and
cumulative voting by distribution.
Under the first method, a stockholder is
allowed to concentrate his votes and give
one candidate as many votes as the
number of directors to be elected,
multiplied by the number of his shares
shall equal. For example, supposing a
stockholder owns 200 shares and there
are five directors to be elected, he is
entitled to 1,000 votes, all of which he
may cast in favor of one candidate.
Under the second method, a stockholder
may cumulate his shares by multiplying
also the number of his shares by the
number of directors to be elected, and
distribute the same among as many
candidates as he shall see fit. For
example, a stockholder with 100 shares is
entitled to 500 votes if there are five
directors to be elected. He may cast his
votes in any combination desired by him,
provided that the total number of votes
cast by him does not exceed 500, which
is the number of shares owned by him
multiplied by the total number of

2013 & 2014 Q and A|

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directors to be elected. [SEC OGC Opinion


No. 14-10, 2 June 2014]
27.
Can a hold-over director
appoint another director to fill
a vacancy caused by the
resignation of another holdover director?
No. a vacancy caused by resignation of a
hold-over director or a trustee cannot be
filled by the vote of the directors or
trustees, but rather, by the vote of the
stockholders or members in a regular or
special meeting called for the purpose, as
provided by Section 29 of the Corporation
Code. Any vacancy occurring in the board
of directors or trustees other than by
removal by the stockholders or members
or by expiration of term, may be filled by
majority of the remaining directors or
trustees, if still constituting a quorum,
otherwise, said vacancies must be filled
by the stockholders in a regular or special
meeting called for that purpose. A
director or trustee so elected to fill a
vacancy shall be elected only for the
unexpired term of his predecessor in
officer. Thus, in a situation where
directors or trustees are acting in a holdover
capacity,
there
are
actually
vacancies caused by expiration of terms,
and the resignation of a hold-over
director or trustee cannot change the
nature of the vacancy. [Valle Verde
Country Club v. Africa, GR No. 151696,
September 4, 2009; SEC-OGC Opinion No.
13-11, 20 November 2013]
28.
Is it required that, in
order to be elected as a
member
of
the
board
of
trustees
of
a
non-stock
corporation, majority of the
votes of the members be
obtained?
Starr Weigand 2014
Commercial Law

No. While the Corporation Code requires


the presence of at least majority of the
members of the non-stock corporation for
the election of its Board, it does not
require such number of votes for one to
be declared elected. under the Code, the
candidates receiving the highest number
of votes shall be declared elected. Thus,
for a candidate to be elected as trustee,
such candidate must be among the group
of candidates who received the highest
number of votes. In case the number of
candidates does not exceed the number
of seats in the board, said candidates,
provided they received votes, can be said
to have received the highest number of
votes, as the law requires only plurality of
the votes to cast at the election. [SEC
OGC Opinion No. 14-09, 2 June 2014]
29.
Can there be an election
of members of the board which
is less than the number of
director/trustees as fixed in the
articles of incorporation?
Yes. An election of less number of
directors than the number which the
meeting was called to elect is valid as to
those elected. Thus, the stockholders or
members may opt to elect a number of
directors/trustees less than the number of
directors/trustees as fixed in the articles
of incorporation. Such a situation would
merely give rise to vacancy in the board,
which may be later filled up. The power of
the board is not suspended by vacancies
in the board unless the number is
reduced below a quorum. This is so since
the board can only transact business if it
reaches a quorum, which is at least a
majority of the number of trustees as
fixed in the articles of incorporation or bylaws, unless the Articles, by-laws, or
Master Deed, in the case of a
2013 & 2014 Q and A|

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condominium corporation provide for a


greater number. For decisions of the
board to be valid as a corporate act, at
least a majority of such majority or
quorum has to concur. However, for the
election of officers, the vote of the
majority of all the members of the board
as fixed in the articles of incorporation,
rather than majority of the quorum, shall
be required. [SEC OGC Opinion No. 14-09,
2 June 2014]
30.
Can
notices
of
stockholders
or
directors
meetings
be
sent
through
electronic mail (e-mail)? Are
the resolutions passed during
such meetings valid?
Yes. Generally and as a default rule,
written notice of the meeting, sent
through regular post mail, must be given
to stockholders/directors/ trustees in
relation to the holding of meetings within
the periods provided in the Corporation
Code. However, Section 47(1), (2), and
(6) allows the corporation to provide a
different mode of notice in the by-laws.
Thus, since the Corporation Code requires
notice to be sent in writing, an e-mail
notice may be included as a mode of
notice in the by-laws of a corporation,
since an e-mail is considered in writing.
In such a case, the by-laws must,
likewise, provide for mechanics of such
sending of notices through e-mail,
including indication, recording, changing,
and recognition of e-mail addresses of
each stockholder/director. However, it
must be stressed that absent such
specific provisions on notice requirements
in a corporations current and standing
by-laws, the general or default rule
written notice sent through regular postal
mail applies. Since such notice is
allowed, provided it is in accordance with
Starr Weigand 2014
Commercial Law

a corporations by-laws, then resolutions


passed during such meetings are also
valid. [SEC OGC Opinion No. 13-10, 25
October 2013]
31.
APOs by-laws, a nonstock non-profit corporation,
provide that its members are
those
that
are
issued
certificates of ownership, with
only
one
certificate
being
issued for one member. The
same by-laws provide that not
more than 500 certificates of
ownership
will
be
issued.
However,
its
articles
of
incorporation
provide
that
members enjoy membership
rights, upon payment of a
membership fee, upon payment
of which, they will be issued a
membership
fee
certificate,
which shall not be issued in
excess of 250, with only one
certificate being issued per
member. What is the authorized
membership of APO, 500 or
250?
The maximum number of members
allowed for APO is 250. The question
arose from what appears to be a conflict
between the articles and the by-laws.
When the by-laws of a corporation are
inconsistent
with
the
articles
of
incorporation,
the
latter
shall
be
controlling,
as
the
by-laws
are
subordinate to, and cannot contravene,
the corporate charter. As provided for in
the articles of APO, the maximum
permitted number of Certificates of
Membership issued by it is limited to 250,
and no member shall be issued more
than
one
certificate.
Hence,
the
maximum number of members is the
maximum number of certificates that
2013 & 2014 Q and A|

- 27 -

may be issued, that is 250, by virtue of


the articles of incorporation, and not 500
as provided by the by-laws. [SEC OGC
Opinion No. 14-25, 4 September 2014]
32.
L was hired as a Director
of CBB, who was later on
appointed
as
managing
director. Alleging failure to pay
a significant portion of his
salary, after closure of CBB and
the incorporation of a new
corporation,
he
filed
a
complaint for illegal dismissal
against CBB and its president.
Can CBBs president be held
liable?
Yes. There is indubitable link between
closure of CBB and the incorporation of
the new corporation, which was done to
avoid payment of the obligations to L.
CBB ceased to exist only in name; it reemerged in the person of the new
corporation for an urgent purpose to
avoid payment by CBB of the last two
installments of its monetary obligation to
L, as well as its other financial liabilities.
Freed of CBBs liabilities, especially that
owing to L, the new corporation can
continue, as it did continue, CBBs
business. It has long been settled that the
law vests a corporation with a personality
distinct
and
separate
from
its
stockholders or members. In the same
vein, a corporation, by legal fiction and
convenience, is an entity shielded by a
protective mantle and imbued by law
with a character alien to the persons
comprising it. Nonetheless, the shield is
not at all times impenetrable and cannot
be extended to a point beyond its reason
and policy. Circumstances might deny a
claim for corporate personality, under the
doctrine of piercing the veil of corporate
fiction.
Starr Weigand 2014
Commercial Law

Piercing the veil of corporate fiction is an


equitable doctrine developed to address
situations where the separate corporate
personality of a corporation is abused or
used for wrongful purposes. Under the
doctrine, the corporate existence may be
disregarded where the entity is formed or
used for nonlegitimate purposes, such
as to evade a just and due obligation, or
to justify a wrong, to shield or perpetrate
fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or
intentions, in which case, the fiction will
be disregarded and the individuals
composing it and the two corporations
will be treated as identical. [Eric Godfrey
Stanley
Livesey
v.
Binswanger
Philippines, Inc. and Keith Elliot, G.R. No.
177493, March 19, 2014]
33.
M was hired by S Tech as
the head and manager of one of
its units. Subsequently, N was
employed as her manager. M's
hard disk crashed causing her
to lose files, and she informed
N.
Ms
position
was
downgraded twice and later on,
she was informed that her
position was redundant. An
action for illegal dismissal was
filed by M against S Tech and
its HR Director. Can the case
prosper
against
the
HR
Director?
No. It is hornbook principle that personal
liability of corporate directors, trustees or
officers attaches only when: (a) they
assent to a patently unlawful act of the
corporation, or when they are guilty
of bad faith or gross negligence in
directing its affairs, or when there is
a
conflict
of
interest resulting
in
damages
to
the
corporation,
its
2013 & 2014 Q and A|

- 28 -

stockholders or other persons; (b) they


consent to the issuance of watered down
stocks or when, having knowledge of
such issuance, do not forthwith file
with the corporate secretary their
written objection; (c) they agree to hold
themselves personally and solidarily
liable with the corporation; or (d) they are
made by specific provision of law
personally answerable for their corporate
action. In the case of M, there is no
evidence to show that
the aboveenumerated exceptions when a corporate
officer becomes personally liable for the
obligation of a corporation to this case.
[SPI Technologies, Inc., et al. v. Victoria K.
Mapua, G.R. No. 191154, April 7, 2014]
34.
M Corp employed B, who
was later on dismissed from
employment
after
having
tested
positive
during
a
random drug test conducted in
the office. B thus filed an action
for illegal dismissal against M
Corp and E, its president.
Should
the
case
prosper
against E?
No. A corporation has a personality
separate and distinct from its officers and
board of directors who may only be held
personally liable for damages if it is
proven that they acted with malice or bad
faith in the dismissal of an employee.
Absent any evidence on record that
petitioner E acted maliciously or in bad
faith in effecting the termination of
respondent, plus the apparent lack of
allegation in the pleadings E acted in
such manner, the doctrine of corporate
fiction dictates that only petitioner
corporation should be held liable for the
illegal dismissal of respondent. [Mirant
(Philippines) Corporation, et al. v. Joselito
A. Caro, G.R. No. 181490, April 23, 2014]
Starr Weigand 2014
Commercial Law

35.
A mortgage his property
to Bank A, predecessor of Bank
B. However, A defaulted in his
payments, so the mortgage was
foreclosed and Bank B bought
the property. A offered to
repurchase the property, but no
agreement was reached. With A
insisting
that
a
purchase
agreement was reached, he
sold portions of the property
after being subdivided, and
offered to pay for the entire
property. Bank B however sold
the remaining portions of the
property to another person,
which prompted A to cause an
annotation of his adverse claim
on the title thereof. Thereafter,
the property was sold by Bank
B to other persons, without As
knowledge. Thus, A filed an
action for specific performance
against the bank. Was there a
perfected
repurchase
agreement between A and Bank
B, even if no acceptance was
made
by
Bank
Bs
representatives?
No. No such agreement was reached.
Section 23 of the Corporation Code
expressly provides that the corporate
powers of all corporations shall be
exercised by the board of directors. Just
as a natural person may authorize
another to do certain acts in his behalf,
so may the board of directors of a
corporation validly delegate some of its
functions to individual officers or agents
appointed by it. Thus, contracts or acts of
a corporation must be made either by the
board of directors or by a corporate agent
duly authorized by the board. Absent
such valid delegation/authorization, the
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rule is that the declarations of an


individual director relating to the affairs
of the corporation, but not in the course
of, or connected with, the performance of
authorized duties of such director, are
held not binding on the corporation.
Thus, a corporation can only execute its
powers and transact its business through
its Board of Directors and through its
officers and agents when authorized by a
board resolution or its by-laws.
In the absence of conformity or
acceptance by properly authorized bank
officers of petitioners counter-proposal,
no perfected repurchase contract was
born out of the talks or negotiations
between
petitioner
and
Bank
Bs
representatives. Petitioner therefore had
no legal right to compel respondent bank
to accept the P600,000 being tendered
by him as payment for the supposed
balance of repurchase price. [Heirs of
Fausto C. Ignacio vs. Home Bankers
Savings and Trust Co., et al., G.R. No.
177783. January 23, 2013]
36.
TRB sold to BOC its
banking business which was
later on approved by the BSP
monetary board. Later, as a
result
of
previous
court
litigation, TRB was order to pay
RPN, IBB and BBC damages, for
which a writ of execution was
issued,
which
included
properties
covered
by
the
covered by the sale to BOC. Can
BOC be held liable for the
damages to be paid to RPN, IBB
and BBC?
No. Merger is a re-organization of two or
more corporations that results in their
consolidating into a single corporation,
which is one of the constituent
Starr Weigand 2014
Commercial Law

corporations,
one
disappearing
or
dissolving and the other surviving. To put
it another way, merger is the absorption
of one or more corporations by another
existing corporation, which retains its
identity and takes over the rights,
privileges, franchises, properties, claims,
liabilities and obligations of the absorbed
corporation(s). The absorbing corporation
continues its existence while the life or
lives of the other corporation(s) is or are
terminated.
The Corporation
following
steps
consolidation:

Code
for

requires
merger

the
or

(1) The board of each corporation


draws up a plan of merger or
consolidation. Such plan must
include
any
amendment,
if
necessary, to the articles of
incorporation of the surviving
corporation,
or
in
case
of
consolidation, all the statements
required
in
the
articles
of
incorporation of a corporation.
(2)
Submission
of
plan
to
stockholders or members of each
corporation for approval. A meeting
must be called and at least two (2)
weeks notice must be sent to all
stockholders
or
members,
personally or by registered mail. A
summary of the plan must be
attached to the notice. Vote of twothirds of the members or of
stockholders
representing
two
thirds of the outstanding capital
stock will be needed. Appraisal
rights, when proper, must be
respected.
(3) Execution
of the
formal
agreement, referred to as the
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articles
of
merger
o[r]
consolidation, by the corporate
officers
of
each
constituent
corporation. These take the place of
the articles of incorporation of the
consolidated corporation, or amend
the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of
merger or consolidation to the SEC
for approval.
(5) If necessary, the SEC shall set a
hearing, notifying all corporations
concerned at least two weeks
before.
(6) Issuance of certificate of merger
or consolidation.
Indubitably, it is clear that no merger
took place between BOC and TRB as the
requirements and procedures for a
merger were absent. A merger does not
become
effective
upon
the
mere
agreement
of
the
constituent
corporations. All
the
requirements
specified in the law must be complied
with in order for merger to take effect.
Section 79 of the Corporation Code
further provides that the merger shall be
effective only upon the issuance by the
Securities and Exchange Commission
(SEC) of a certificate of merger.
Here, BOC and TRB remained separate
corporations with distinct corporate
personalities. What happened is that TRB
sold and BOC purchased identified
recorded assets of TRB in consideration of
BOCs assumption of identified recorded
liabilities of TRB including booked
contingent accounts. In strict sense, no
merger or consolidation took place as the
records do not show any plan or articles
Starr Weigand 2014
Commercial Law

of
merger
or
consolidation.
More
importantly, the SEC did not issue any
certificate of merger or consolidation.
[Bank of Commerce v. Radio Philippines
Network, Inc., et al., G.R. No. 195615,
April 21, 2014]
37.
KMBIs
by-laws
and
articles
of
incorporation
provide that its board of
trustees shall consist of 9
members to serve for one year.
But, due to resignation of five
of them, and the death of
another, only 3 members of the
board
remain.
Can
the
remaining 3 members continue
the regular business of the
corporation and fill up the
vacancies in the board?
The general rule is well-settled that the
power of the board is not suspended by
vacancies in the board unless the number
is reduced to below a quorum, the rule
being that the number necessary to
constitute a quorum under a by-law
which provides that a majority of the
directors shall be necessary and sufficient
to constitute a quorum, is a majority of
the entire board, notwithstanding that
there may be vacancies in the board at a
time. In the case of KMBI, the presence of
9 members would be required to
constitute a quorum. There being no
quorum with only 3 remaining members
of the board, then the board has no
authority to transact business. Also, they
do not have authority to fill-up vacancies
in the board. Not only is there no quorum,
but the circumstances are not one of
those which would allow the remaining
directors to fill in a vacancy. Based on 29
of the Corporation Code, the remaining
directors/trustees
can
fill-up
the
vacancies in the board when: (1) such
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vacancies were occasioned by reasons


other
than
removal
by
the
stockholders/members or expiration of
term;
and
(2)
such
remaining
director/trustees still constitute a quorum
of the Board. These conditions must
concur; otherwise, the filling-up of
vacancies must be done by the
stockholders or members in a regular or
special meeting called for the purpose.
[SEC OGC Opinion No. 13-06, 6 May
2013]
38.
Does the President of a
close corporation have the
authority to decide on matters
concerning
the
corporation
even without the approval of
the Board?
Yes. A close corporation is one where the
articles of incorporation provide that: (1)
all the corporations issued stocks of all
classes, exclusive of treasury shares,
shall be held of records by not more than
a specified number of persons, not
exceeding 20; (2) all of the issued stocks
of all classes shall be subject to
restrictions on transfer permitted by the
Corporation Code; and (3) the corporation
shall not list in any stock exchange or
make any public offering of any of its
stock of any class. The main difference
between a close corporation and other
corporations is the identity of stock
ownership and active management, that
is, all or most of the stockholders of a
close corporation are active in the
corporate business either as directors,
officers
or
other
key
men
in
management. Where business associates
belong to a small, closely-knit group, they
usually prefer to keep the organization
exclusive and would not welcome
strangers. Since it is through their efforts
and managerial skills that they expect
Starr Weigand 2014
Commercial Law

the business to grow and prosper, it is


quite understandable why they would
not trust outsiders to come in and
interfere with their management of
business, and much less share whatever
fortune, big or small, that the business
may bring.
In an ordinary corporation, the Presidents
power of general control and supervision
over the corporate business grants him
an apparent authority to enter into
transactions on behalf o the corporation
in the ordinary course of business, unless
prohibited by the Articles of Incorporation
or the By-laws. The acts, even if priorly
unauthorized, may be later ratified by the
Board of Directors or Trustees, which
ratification cleanses the transaction of
defects. In the case of close corporations,
the act of the President, who is also a
Director, may not need later ratification
of the Board, provided that any of the
following conditions are present:
1. Before the action is taken, written
consent thereto is signed by all the
directors;
2. All the stockholders have actual or
implied knowledge of the action
and make no prompt objection
thereto in writing;
3. The directors are accustomed to
take informal action with the
express or implied acquiescence of
all the stockholders; or
4. All the directors have express or
implied knowledge of the action in
question and none of them makes
prompt objection thereto in writing.
[SEC OGC Opinion No. 14-23, 26
August 2014]

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39.
What is the current limit
on the shareholdings of an
Independent Director?
Paragraphs 2 and 6, Rule 38 of the
Amended IRR of the Securities Regulation
Code are the controlling provisions on the
definition,
qualification
and
disqualification
of
an
independent
director. In other words, a person is
qualified to be elected as an independent
director provided he is independent of
management and free from any business
or other relationship which could, or could
reasonably be perceived to, materially
interfere with his exercise of independent
judgment
in
carrying
out
his
responsibilities as a director in any
covered company, and includes, among
others, any person who does not own
more than 2% of the shares of the
covered company and/or its related
companies or any of its substantial
shareholders. The 10% limit on
beneficial ownership in the covered
company's equity security in which an
independent director is to be elected no
longer holds true. [SEC OGC Opinion No.
13-04, 18 April 2013; Emphasis supplied]
40.
M Corp. was engaged in
the business of selling medical
equipment, and has A as one of
its directors. A had a daughter,
B, who owns 80% of E Corp.,
also engaged in the selling of
medical equipment. Some of
the clients of M Corp. stopped
doing
business
with
it,
allegedly
due
to
the
intervention of A, in favor of his
daughters interest in E Corp. Is
there a conflict of interest on
the part of A, which would
disqualify him from continuing
to be a director in M Corp?
Starr Weigand 2014
Commercial Law

If the by-laws of M Corp. provides as a


qualification for directors that a director
shall not be the immediate member of
the family of any stockholder in any other
firm, company, or association which
competes with the subject corporation,
then A can be disqualified. Every
corporation has the inherent power to
adopt by-laws for its internal government,
and to regulate the conduct and prescribe
the rights of its members towards itself
and among themselves in reference to
the management of its affairs. Thus,
under Section 47(5) of the Corporation
Code, a corporation may prescribe in its
by-laws the qualifications of its directors,
officers, and employees. The qualification
that a director shall not be the
immediate member of the family of any
stockholder in any other firm, company,
or association which competes with the
subject corporation is a qualificational
by-law provision which may be added to
those specified in the Corporation Code
(Sections 23 and 27), pursuant to the
case of Gokongwei v. SEC, GR No. L45911, 11 April 1979). Thus, corporations
have the power to make by-laws
declaring a person employed in the
service of a rival company to be ineligible
for the Corporations Board of Directors
and a provision which renders ineligible,
or if elected, subjects to removal, a
directors if he be also a director in a
corporation
whose
business
is
in
competition with or is antagonistic to the
other corporation is valid. However, these
qualifications become effective only when
the by-laws expressly provide for the
same.
However, A may be held liable for
damages for bad faith in directing the
affairs of the corporation, under Section
31 of the Corporation Code, or to account
for any profit obtained to the prejudice of
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the corporation by acquiring business


opportunity which should have belonged
to the corporation, pursuant to Section 34
of the Corporation Code. [SEC OGC
Opinion No. 14-04, 21 April 2014]
41.
M Corp, T Corp and N Corp
applied for Mineral Production
Sharing Agreements (MPSA)
with the DENR. This was
opposed by R Corp because it
alleged that at least 60% of the
capital
stock
of
the
corporations are owned and
controlled by MBMI, a 100%
Canadian corporation. R Corp
reasoned that since MBMI is a
considerable
stockholder
of
petitioners, it was the driving
force behind petitioners filing
of the MPSAs over the areas
covered by applications since it
knows
that
it
can
only
participate in mining activities
through corporations which are
deemed Filipino citizens. R
Corp argued that given that
petitioners capital stocks were
mostly owned by MBMI, they
were likewise disqualified from
engaging in mining activities
through MPSAs, which are
reserved
only
for
Filipino
citizens. Decide.
It is quite safe to say that petitioners M
Corp, T Corp and N Corp are not Filipino
since
MBMI,
a
100%
Canadian
corporation, owns 60% or more of their
equity interests.
Basically, there are two acknowledged
tests in determining the nationality of a
corporation: the control test and the
grandfather rule.

Starr Weigand 2014


Commercial Law

Paragraph 7 of DOJ Opinion No. 020,


Series of 2005, adopting the 1967 SEC
Rules
which
implemented
the
requirement of the Constitution and other
laws pertaining to the controlling
interests in enterprises engaged in the
exploitation of natural resources owned
by Filipino citizens, provides:
Shares belonging to corporations or
partnerships at least 60% of the capital of
which is owned by Filipino citizens shall
be considered as of Philippine nationality,
but if the percentage of Filipino ownership
in the corporation or partnership is less
than 60%, only the number of shares
corresponding to such percentage shall
be counted as of Philippine nationality.
Thus, if 100,000 shares are registered in
the name of a corporation or partnership
at least 60% of the capital stock or
capital, respectively, of which belong to
Filipino citizens, all of the shares shall be
recorded as owned by Filipinos. But if less
than 60%, or say, 50% of the capital
stock or capital of the corporation or
partnership, respectively, belongs to
Filipino citizens, only 50,000 shares shall
be counted as owned by Filipinos and the
other 50,000 shall be recorded as
belonging to aliens.
The first part of paragraph 7, DOJ Opinion
No. 020, stating "shares belonging to
corporations or partnerships at least 60%
of the capital of which is owned by
Filipino citizens shall be considered as of
Philippine nationality," pertains to the
control test or the liberal rule. On the
other hand, the second part of the DOJ
Opinion
which
provides,
"if
the
percentage of the Filipino ownership in
the corporation or partnership is less than
60%, only the number of shares
corresponding to such percentage shall
be counted as Philippine nationality,"
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pertains to the stricter, more stringent


grandfather rule.

Paragraph 7, DOJ Opinion No. 020, Series


of 2005 provides:

Prior to this recent change of events,


petitioners were constant in advocating
the application of the "control test" under
RA 7042, as amended by RA 8179,
otherwise
known
as
the
Foreign
Investments Act (FIA), rather than using
the stricter grandfather rule.

The above-quoted SEC Rules provide for


the manner of calculating the Filipino
interest in a corporation for purposes,
among others, of determining compliance
with
nationality
requirements
(the
Investee Corporation). Such manner of
computation is necessary since the
shares in the Investee Corporation may
be owned both by individual stockholders
(Investing
Individuals)
and
by
corporations and partnerships (Investing
Corporation). The said rules thus provide
for the determination of nationality
depending on the ownership of the
Investee Corporation and, in certain
instances, the Investing Corporation.

"Corporate
layering"
is
admittedly
allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent
laws, then it becomes illegal.
Sec. 2, Article XII of the Constitution
focuses on the State entering into
different types of agreements for the
exploration, development, and utilization
of natural resources with entities who are
deemed Filipino due to 60 percent
ownership of capital is pertinent to this
case, since the issues are centered on the
utilization of our countrys natural
resources or specifically, mining. Thus,
there is a need to ascertain the
nationality of petitioners since, as the
Constitution
so
provides,
such
agreements are only allowed corporations
or associations "at least 60 percent of
such capital is owned by such citizens."
Elementary in statutory construction is
when there is conflict between the
Constitution
and
a
statute,
the
Constitution will prevail. In this instance,
specifically pertaining to the provisions
under Art. XII of the Constitution on
National Economy and Patrimony, Sec. 3
of the FIA will have no place of
application. As decreed by the honorable
framers
of
our
Constitution,
the
grandfather rule prevails and must be
applied.

Starr Weigand 2014


Commercial Law

Under the above-quoted SEC Rules, there


are two cases in determining the
nationality of the Investee Corporation.
The first case is the liberal rule, later
coined by the SEC as the Control Test in
its 30 May 1990 Opinion, and pertains to
the portion in said Paragraph 7 of the
1967 SEC Rules which states, (s)hares
belonging to corporations or partnerships
at least 60% of the capital of which is
owned by Filipino citizens shall be
considered as of Philippine nationality.
Under the liberal Control Test, there is no
need to further trace the ownership of the
60% (or more) Filipino stockholdings of
the Investing Corporation since a
corporation which is at least 60% Filipinoowned is considered as Filipino.
The second case is the Strict Rule or the
Grandfather Rule Proper and pertains to
the portion in said Paragraph 7 of the
1967 SEC Rules which states, "but if the
percentage of Filipino ownership in the
corporation or partnership is less than
60%, only the number of shares
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corresponding to such percentage shall


be counted as of Philippine nationality."
Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the
Investing Corporation and the Investee
Corporation
must
be
traced
(i.e.,
"grandfathered") to determine the total
percentage of Filipino ownership.
Moreover, the ultimate Filipino ownership
of the shares must first be traced to the
level of the Investing Corporation and
added to the shares directly owned in the
Investee Corporation.
In other words, based on the said SEC
Rule and DOJ Opinion, the Grandfather
Rule or the second part of the SEC Rule
applies only when the 60-40 Filipinoforeign equity ownership is in doubt (i.e.,
in cases where the joint venture
corporation with Filipino and foreign
stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other
joint venture corporation which is either
60-40% Filipino-alien or the 59% less
Filipino). Stated differently, where the 6040 Filipino- foreign equity ownership is
not in doubt, the Grandfather Rule will
not apply.
The control test is still the prevailing
mode of determining whether or not a
corporation is a Filipino corporation,
within the ambit of Sec. 2, Art. II of the
1987 Constitution, entitled to undertake
the
exploration,
development
and
utilization of the natural resources of the
Philippines. When in the mind of the
Court there is doubt, based on the
attendant facts and circumstances of the
case,
in
the
60-40
Filipino-equity
ownership in the corporation, then it may
apply the grandfather rule.

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Commercial Law

After a scrutiny of the evidence extant on


record, the Court finds that this case calls
for the application of the grandfather rule
since, as ruled by the POA and affirmed
by the OP, doubt prevails and persists in
the corporate ownership of petitioners.
Here, doubt is present in the 60-40
Filipino
equity
ownership
the
corporations,
since
their
common
investor,
the
100%
Canadian
corporationMBMI, funded them. [Narra
Nickel Mining and Development Corp., et
al. v. Redmont Consolidated Mines, G.R.
No. 195580, April 21, 2014]
N.B. Primarily, it is the incorporation test
which should be applied in determining
the nationality of a corporation. "Under
Philippine jurisdiction, the primary test is
always the Place of Incorporation Test
since we adhere to the doctrine that a
corporation is a creature of the State
whose laws it has been created. A
corporation organized under the laws of a
foreign country, irrespective of the
nationality of the persons who control it is
necessarily a foreign corporation. The
control test and the principal place of
business test (siege social), are merely
adjunct tests, when the place of
incorporation test indicates that the
subject corporation is organized under
Philippine laws. However, based upon
the foregoing, while the incorporation
test serves as the primary test under
Philippine jurisdiction, other tests such as
the control test must be used for
purposes
of
compliance
with
the
provisions of the Constitution and of
other laws on nationality requirements.
Even if the corporation is a creature of
the State, there is a need to further
safeguard/regulate certain areas of
investment
and
activities
for
the
protection of the interests of Filipinos. For
instance, the control test is used to
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determine the eligibility of a corporation,


which has foreign equity participation in
its ownership structure, to engage in
nationalized
or
partly
nationalized
activities. [SEC-OGC Opinion No. 11-42,
12 October 2011; Underscoring supplied]
Also see note the following 2015 case:
The Grandfather Rule is used as a
supplement to the Control Test so that
the intent underlying the averted Sec. 2,
Art. XII of the Constitution be given
effect. The use of the Grandfather Rule as
a supplement to the Control Test is not
proscribed by the Constitution or the
Philippine Mining Act of 1995. To
reiterate, Sec. 2, Art. XII of the
Constitution reserves the exploration,
development, and utilization of natural
resources
to
Filipino
citizens
and
corporations or associations at least
sixty per centum of whose capital is
owned by such citizens. Similarly,
Section 3(aq) of the Philippine Mining Act
of 1995 considers a corporation x x x
registered in accordance with law at least
sixty per cent of the capital of which is
owned by citizens of the Philippines as a
person qualified to undertake a mining
operation. Consistent with this objective,
the Grandfather Rule was originally
conceived to look into the citizenship of
the individuals who ultimately own and
control the shares of stock of a
corporation for purposes of determining
compliance
with
the
constitutional
requirement of Filipino ownership. It
cannot, therefore, be denied that the
framers of the Constitution have not
foreclosed the Grandfather Rule as a tool
in verifying the nationality of corporations
for purposes of ascertaining their right to
participate in nationalized or partly
nationalized activities.

Starr Weigand 2014


Commercial Law

Admittedly, an ongoing quandary obtains


as to the role of the Grandfather Rule in
determining
compliance
with
the
minimum Filipino equity requirement vis-vis the Control Test. This confusion
springs from the erroneous assumption
that the use of one method forecloses the
use of the other.
As exemplified by the above rulings,
opinions, decisions and this Courts April
21, 2014 Decision, the Control Test can
be, as it has been, applied jointly with the
Grandfather Rule to determine the
observance
of
foreign
ownership
restriction in nationalized economic
activities. The Control Test and the
Grandfather Rule are not, as it were,
incompatible
ownership-determinant
methods that can only be applied
alternative to each other. Rather, these
methods can, if appropriate, be used
cumulatively in the determination of the
ownership and control of corporations
engaged in fully or partly nationalized
activities, as the mining operation
involved in this case or the operation of
public utilities as in Gamboa or Bayantel.
The Grandfather Rule, standing alone,
should not be used to determine the
Filipino ownership and control in a
corporation, as it could result in an
otherwise foreign corporation rendered
qualified to perform nationalized or partly
nationalized activities. Hence, it is only
when the Control Test is first complied
with that the Grandfather Rule may be
applied. Put in another manner, if the
subject corporations Filipino equity falls
below the threshold 60%, the corporation
is immediately considered foreign-owned,
in which case, the need to resort to the
Grandfather Rule disappears.

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On the other hand, a corporation that


complies with the 60-40 Filipino to foreign
equity requirement can be considered a
Filipino corporation if there is no doubt as
to who has the beneficial ownership
and control of the corporation. In that
instance, there is no need for a dissection
or further inquiry on the ownership of the
corporate shareholders in both the
investing and investee corporation or the
application of the Grandfather Rule. As a
corollary rule, even if the 60-40 Filipino to
foreign equity ratio is apparently met by
the subject or investee corporation, a
resort to the Grandfather Rule is
necessary if doubt exists as to the locus
of the beneficial ownership and
control. In this case, a further
investigation as to the nationality of the
personalities
with
the
beneficial
ownership and control of the corporate
shareholders in both the investing and
investee corporations is necessary.
As explained in the April 21, 2012
Decision, the doubt that demands the
application of the Grandfather Rule in
addition to or in tandem with the Control
Test is not confined to, or more bluntly,
does not refer to the fact that the
apparent Filipino ownership of the
corporations equity falls below the 60%
threshold. Rather, doubt refers to
various indicia that the beneficial
ownership
and
control
of
the
corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders.
As provided in DOJ Opinion No. 165,
Series of 1984, which applied the
pertinent provisions of the Anti-Dummy
Law in relation to the minimum Filipino
equity requirement in the Constitution,
significant indicators of the dummy
status have been recognized in view of
reports that some Filipino investors or
businessmen are being utilized or [are]
Starr Weigand 2014
Commercial Law

allowing themselves to be used as


dummies
by
foreign
investors
specifically in joint ventures for national
resource exploitation. These indicators
are:
1. That the foreign investors provide
practically all the funds for the joint
investment undertaken by these
Filipino businessmen and their
foreign partner;
2. That
the
foreign
investors
undertake to provide practically all
the technological support for the
joint venture;
3. That the foreign investors, while
being
minority
stockholders,
manage the company and prepare
all economic viability studies.
(However) Suffice it to say in this regard
that, while the Grandfather Rule was
originally
intended
to
trace
the
shareholdings to the point where natural
persons hold the shares, the SEC had
already set up a limit as to the number of
corporate layers the attribution of the
nationality of the corporate shareholders
may be applied.
In a 1977 internal memorandum, the SEC
suggested applying the Grandfather Rule
on two (2) levels of corporate relations for
publicly-held corporations or where the
shares are traded in the stock exchanges,
and to three (3) levels for closely held
corporations or the shares of which are
not traded in the stock exchanges.14
These limits comply with the requirement
in Palting v. San Jose Petroleum , Inc. that
the application of the Grandfather Rule
cannot go beyond the level of what is
reasonable.

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[Narra Nickel Mining and Development


Corp. v. Redmont Consolidated, GR No.
195580, January 28, 2015]
42.
For
purposes
of
determining compliance with
ownership requirements under
the Constitution and existing
laws, for corporations engaged
in
areas
of
activities
or
enterprises
specifically
reserved, wholly or partly, to
Philippine
Nationals,
what
should be considered?
For this purpose, capital under Section
11, Article XII of the 1987 Constitution
refers to shares of stock entitled to vote
in the election of directors. [Heirs of
Gamboa
v.
Teves,
G.R.No.176579,
October 9, 2012] Thus, for purposes of
determining compliance therewith, the
required percentage of Filipino ownership
shall be applied to BOTH (a) the total
number of outstanding shares of stock
entitled to vote in the election of
directors; AND (b) the total number of
outstanding shares of stock, whether or
not entitled to vote in the election of
directors. [SEC Memorandum Circular no.
8, series of 2013]
Both the Voting Control Test and the
Beneficial Ownership Test must be
applied
to
determine
whether
a
corporation is a Philippine national.
[Heirs
of
Gamboa
v.
Teves,
G.R.No.176579, October 9, 2012]
43.
Y was the newly elected
president of S Corp. who,
during a meeting, demanded
the turnover of the corporate
records from Q. The said
records, however, were with C,
the corporate accountant, who
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kept them for Q. Later on, C


and Q caused the removal of
the corporate records from the
company
premises.
B,
the
corporate
secretary,
also
demanded for the turnover of
the stock and transfer book
from P. P however said it will be
deposited in a safety deposit
but with E Bank. But, this was
also taken by Q. Q brought the
book to the company office and
demanded that entries be made
therein. A court had already
ordered that the said entries be
deleted, but Q refused to do so,
and he still kept custody of the
corporate records. Thus, a
criminal complaint was filed
against C, Q, and P. Should the
case be dismissed?
Yes. A criminal action based on the
violation of a stockholder's right to
examine or inspect the corporate records
and the stock and transfer book of a
corporation under the second and fourth
paragraphs of Section 74 of the
Corporation Code-such as this criminal
case--can only be maintained against
corporate officers or any other persons
acting on behalf of such corporation.
However, the instant case clearly suggest
that respondents are neither in relation to
S Corp. While Section 74 of the
Corporation Code expressly mentions the
application of Section 144 only in relation
to the act of "refus[ing] to allow any
director, trustees, stockholder or member
of the corporation to examine and copy
excerpts from [the corporation's] records
or minutes," the same does not mean
that the latter section no longer applies
to any other possible violations of the
former
section.

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It must be emphasized that Section 144


already purports to penalize "[v]iolations"
of "any provision" of the Corporation
Code
"not
otherwise
specifically
penalized therein." It is inconsequential
the fact that that Section 74 expressly
mentions the application of Section 144
only to a specific act, but not with respect
to the other possible violations of the
former section.
There is no cogent reason why Section
144 of the Corporation Code cannot be
made to apply to violations of the right of
a stockholder to inspect the stock and
transfer book of a corporation under
Section
74(4)
given
the
already
unequivocal intent of the legislature to
penalize violations of a parallel right, i.e.,
the right of a stockholder or member to
examine the other records and minutes of
a corporation under Section 74(2).
Certainly, all the rights guaranteed to
corporators under Section 74 of the
Corporation Code are mandatory for the
corporation to respect. All such rights are
just the same underpinned by the same
policy consideration of keeping public
confidence in the corporate vehicle thru
an assurance of transparency in the
corporation's operations.
Refusing to allow inspection of the stock
and transfer book when done in violation
of Section 74(4) of the Corporation Code,
properly falls within the purview of
Section 144 of the same code and thus
may be penalized as an offense.
A criminal action based on the violation of
a stockholder's right to examine or
inspect the corporate records and the
stock and transfer hook of a corporation
under the second and fourth paragraphs
of Section 74 of the Corporation Code can
only he maintained against corporate
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officers or any other persons acting on


behalf of such corporation.
A perusal of the second and fourth
paragraphs of Section 74, as well as the
first paragraph of the same section,
reveal that they are provisions that
obligates a corporation: they prescribe
what books or records a corporation is
required to keep; where the corporation
shall keep them; and what are the other
obligations of the corporation to its
stockholders or members in relation to
such books and records. Hence, by parity
of reasoning, the second and fourth
paragraphs of Section 74, including the
first paragraph of the same section, can
only be violated by a corporation. It is
clear then that a criminal action based on
the violation of the second or fourth
paragraphs of Section 74 can only be
maintained against corporate officers or
such other persons that are acting on
behalf of the corporation. Violations of
the second and fourth paragraphs of
Section 74 contemplates a situation
wherein a corporation, acting thru one of
its officers or agents, denies the right of
any of its stockholders to inspect the
records, minutes and the stock and
transfer book of such corporation.
The problem the instant case and the
evidence submitted during preliminary
investigation is that they do not establish
that respondents were acting on behalf of
S Corp. Quite the contrary, the scenario
painted by the complaint is that the
respondents are merely outgoing officers
of S Corp who, for some reason, withheld
and refused to tum-over the company
records of S Corp; that it is the petitioners
who are actually acting on behalf of S
Corp; and that S Corp is actually merely
trying to recover custody of the withheld
records. In other words, petitioners are
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not actually invoking their right to inspect


the records and the stock and transfer
book of S Corp under the second and
fourth paragraphs of Section 74. What
they seek to enforce is the proprietary
right of S Corp to be in possession of such
records and book. Such right, though
certainly legally enforceable by other
means, cannot be enforced by a criminal
prosecution based on a violation of the
second and fourth paragraphs of Section
74. That is simply not the situation
contemplated by the second and fourth
paragraphs of Section 74 of the
Corporation Code. [Aderito Z. Yujuico and
Bonifacio C. Sumbilla v. Cezar T.
Quiambao and Eric C. Pilapil, G.R. No.
180416, June 2, 2014]
44.
A complaint for injunction
and damages was filed by ADC
Corp against AHV Association
and its president. This arose as
ADC
alleged
that
AHV
Association
constructed
a
multi-purpose
hall
and
swimming pool on one of the
parcels of land owned by ADC
which were to be sold without
its
consent
and
approval.
However, its SEC registration
had been revoked more than
three
years
prior
to
the
institution of the action. Can it
still file the instant case?
No. It is to be noted that the time during
which the corporation, through its own
officers, may conduct the liquidation of its
assets and sue and be sued as a
corporation is limited to three years from
the time the period of dissolution
commences; but there is no time limit
within which the trustees must complete
a liquidation placed in their hands. It is
provided only (Corp. Law, Sec. 78 [now
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Sec. 122]) that the conveyance to the


trustees must be made within the threeyear period. It may be found impossible
to complete the work of liquidation within
the three-year period or to reduce
disputed claims to judgment. The
authorities are to the effect that suits by
or against a corporation abate when it
ceased to be an entity capable of suing or
being sued (7 R.C.L., Corps., par. 750);
but trustees to whom the corporate
assets have been conveyed pursuant to
the authority of Sec. 78 [now Sec. 122]
may sue and be sued as such in all
matters connected with the liquidation.
Still in the absence of a board of directors
or trustees, those having any pecuniary
interest in the assets, including not only
the shareholders but likewise the
creditors of the corporation, acting for
and in its behalf, might make proper
representations with the Securities and
Exchange
Commission,
which
has
primary and sufficiently broad jurisdiction
in matters of this nature, for working out
a final settlement of the corporate
concerns. The trustee of a corporation
may continue to prosecute a case
commenced by the corporation within
three years from its dissolution until
rendition of the final judgment, even if
such judgment is rendered beyond the
three-year period allowed by Section 122
of the Corporation Code. However, there
is nothing in the said cases which allows
an already defunct corporation to initiate
a suit after the lapse of the said threeyear period. [Alabang Development
Corporation v. Alabang Hills Village
Association and Rafael Tinio, G.R. No.
187456, June 2, 2014]
45.
INC,
a
religious
corporation,
had
been
in
existence since 1914. Has its
corporate term expired in line
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with the provisions


Corporation Code?

of

the

No. Religious corporations may be


allowed to exist perpetually. While the
Corporation Code has specific provisions
for religious corporations, set out in Title
XIII on Special Corporations, particularly
Sections 110 and 116, both of which do
not provide for a term of existence for
religious corporations, whether classified
as a corporation sole or religious society.
The law never intended to limit the
corporate life of religious corporations,
hence, they may be allowed to exist
perpetually. Religious corporations may
limit their corporate term by providing a
specific term in their articles of
incorporation. However, absent such
specification, it shall be understood that
the corporation intended to exist for an
indefinite period. [SEC OGC Opinion No.
14-18, 10 July 2014]
46.
What is the corporate
term
of
an
educational
institution incorporated under
the Corporation Code?
The corporate terms of such should also
be 50 years in accordance with the
provisions of the Corporation Code.
However,
if
the
corporation
was
incorporated under the older Corporation
Law, which did not require a maximum
corporate term for corporations, then
they should amend their articles of
incorporation
to
comply
with
the
applicable provisions of the Corporation
Code on or before May 1, 1982, the
expiry date of the two (2) year period, the
SEC will consider the provisions of the
latter law as written into the articles of
incorporation as of May 1, 1980, the date
of effectivity of the Corporation Code."
Hence,
based
on
the
said
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Commercial Law

pronouncement, the 50-year period


should be counted from 01 May 1980, in
accordance with the Corporation Code.
The 50-year period should not be counted
from the date of registration as this would
adversely affect the operations of pre-war
schools which were established more
than fifty (50) years from the date of
effectivity of the Corporation Code since
it would result in the dissolution of said
corporations as the 50-year period had
already lapsed. [SEC-OGC Opinion No.
13-05, 24 April 2013]
47.
Is a foreign corporation
required to obtain a license to
transact
business
in
the
Philippines if such becomes a
member
of
a
petroleum
consortium, but is not the
operator thereof, and will hold
only a minority and noncontrolling interest therein?
Yes, if the corporation is not a mere
limited partner, then the subject foreign
corporation still needs to obtain a license
to do business in the Philippines under
the Foreign Investments Act (FIA) of
1991, notwithstanding the fact that it
holds a minority and non-controlling
interest in the consortium. A consortium
or joint venture is a form of partnership,
governed by the laws of partnership.
Doing business is, among others, the
participation
in
the
management,
supervision, or control of any domestic
business, firm, entity, or corporation. in
order to be exempted from obtaining a
license to do business in the Philippines,
the foreign corporation must prove that it
merely invested as a shareholder in a
domestic corporation. This is limited to
investment in a corporation, which does
not necessarily include investment in a
partnership. There being differences
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between the two, the effects of such


investments should be differentiated.
Investment in a partnership will only be
akin to an investment in a corporation
that is exempt from the doing of business
rule only when the foreign corporation is
exclusively a limited partner and takes no
part in the management and control of
the business operation of the limited
partnership. If the corporation is not a
limited partner and actively takes part in
the control of the business, then the
corporation is doing business in the
Philippines as provided in Section 3(d) of
the FIA, thus, must secure a license to do
business in the Philippines. [SEC Opinion
No. 14-01, 21 February 2014]

Securities Regulation Code


1. A complaint was filed by joint
account holders, G, T, and L,
against Citibank NA and its
officials for violation of the
Revised Securities Act (RSA)
and the Securities Regulation
Code. It was alleged that G, T,
and L were induced by the
banks VP and Director to sign
a subscription agreement to
purchase income notes. Later
on, they were again made to
purchase other income notes.
They
found
out
that
the
investments declined and that
the notes were not registered
with the SEC in accordance with
the law. Citibank and its
officials alleged that the action
had already prescribed. What is
the
prescriptive
period
applicable in the instant case?
The SRC does not provide for a
prescriptive period for the enforcement of
criminal liability, thus, RA 3362 would
come into play. Under Section 73 of the
SRC, violation of its provisions or the rules
and regulations is punishable with
imprisonment of not less than seven
(7)years nor more than twenty-one (21)
years. Applying Section 1 of Act No.3326,
a criminal prosecution for violations of
the SRC shall, therefore, prescribe in
twelve (12) years.
Hand in hand with Section 1, Section 2 of
Act No. 3326 states that "prescription
shall begin to run from the day of the
commission of the violation of the law,
and if the same be not known at the time,
from the discovery thereof and the
institution of judicial proceedings for its

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investigation and punishment." [Citibank


N.A. v. Tanco-Gabaldon, G.R. No. 198444,
September 4, 2013]

Transportation Laws
1. N Corp. shipped goods to UMC
from Japan to Manila. The
goods were insured by P
Insurance against all risks.
When they arrived in Manila, it
was found that one package
was in bad order. UMC declared
the damaged goods as a total
loss. P insurance paid UMC for
the loss, and filed a complaint
against
N
Corp.
and
the
brokers.
The
goods
were
delivered to UMC on May 12,
1995, and it filed a bad order
survey on that same day. The
action was filed by the insurer
on January 18, 1996. Has the
action prescribed?
No. The prescriptive period for filing an
action for the loss or damage of the
goods under the COGSA is found in
paragraph (6), Section 3, thus:
(6) Unless notice of loss or damage
and the general nature of such loss or
damage be given in writing to the
carrier or his agent at the port of
discharge before or at the time of the
removal of the goods into the custody
of the person entitled to delivery
thereof under the contract of carriage,
such removal shall be prima facie
evidence of the delivery by the carrier
of the goods as described in the bill of
lading. If the loss or damage is not
apparent, the notice must be given
within three days of the delivery.
Said notice of loss or damage maybe
endorsed upon the receipt for the goods
given by the person taking delivery
thereof.

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The notice in writing need not be given if


the state of the goods has at the time of
their receipt been the subject of joint
survey or inspection.
In any event the carrier and the ship shall
be discharged from all liability in respect
of loss or damage unless suit is brought
within one year after delivery of the
goods or the date when the goods should
have been delivered: Provided, That if a
notice of loss or damage, either apparent
or concealed, is not given as provided for
in this section, that fact shall not affect or
prejudice the right of the shipper to bring
suit within one year after the delivery of
the goods or the date when the goods
should have been delivered.
A letter of credit is a financial device
developed by merchants as a convenient
and relatively safe mode of dealing with
sales of goods to satisfy the seemingly
irreconcilable interests of a seller, who
refuses to part with his goods before he is
paid, and a buyer, who wants to have
control of his goods before paying.
However, letters of credit are employed
by the parties desiring to enter into
commercial transactions, not for the
benefit of the issuing bank but mainly for
the benefit of the parties to the original
transaction, in these cases, N Corp. as
the seller and UMC as the buyer. Hence,
the latter, as the buyer of the goods,
should be regarded as the person entitled
to delivery of the goods. Accordingly, for
purposes of reckoning when notice of loss
or damage should be given to the carrier
or its agent, the date of delivery to UMC
is controlling.
A request for, and the result of a bad
order examination, done within the
reglementary period for furnishing notice
of loss or damage to the carrier or its
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Commercial Law

agent, serves the purpose of a claim. A


claim is required to be filed within the
reglementary period to afford the carrier
or depositary reasonable opportunity and
facilities to check the validity of the
claims while facts are still fresh in the
minds of the persons who took part in the
transaction and documents are still
available. Here, UMC filed a request for
bad order survey on May 12, 1995, even
before all the packages could be
unloaded to its warehouse.
Moreover, paragraph (6), Section 3 of the
COGSA clearly states that failure to
comply with the notice requirement shall
not affect or prejudice the right of the
shipper to bring suit within one year after
delivery of the goods. The insurer, as
subrogee of UMC, filed the Complaint for
damages on January 18, 1996, just eight
months after all the packages were
delivered to its possession on May 17,
1995.
Evidently,
the
action
was
seasonably filed. [Asian Terminals, Inc. v.
Philam Insurance Co., Inc. (now Chartis
Philippines
Insurance
Inc.)/
Philam
Insurance
Co.,
Inc.
(now
Chartis
Philippines Insurance Inc.) v. Westwind
Shipping
Corporation
and
Asian
Terminals,
Inc./
Westwind
Shipping
Corporation v. Philam Insurance Co., Inc.
and Asian Terminals, Inc., G.R. Nos.
181163/181262/181319, July 24, 2013]
2. S Corp. shipped goods on board
a vessel owned by E Shipping,
to
be
delivered
to
the
consignee, C Steel. The goods
were insured by MS Insurance.
The shipment arrived in Manila,
but it was found that some of
the
goods
were
in
bad
condition. When delivered to C
Steel, the latter rejected the
goods being unfit for their
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intended
purpose.
S
Corp
thereafter
shipped
another
batch of goods under similar
circumstances,
which
when
they arrived in Manila, were
also found to be in bad order.
Again, C Steel rejected the
goods. C Steel was paid by MS
Insurance for the damage to
the goods, and thus, MS
Insurance filed an action for
damages against E Shipping
and the stevedore. Can E
Shipping be held liable?

general rule, are presumed to have been


at fault or negligent if the goods they
transported deteriorated or got lost or
destroyed. That is, unless they prove that
they exercised extraordinary diligence in
transporting the goods. In order to avoid
responsibility for any loss or damage,
therefore, they have the burden of
proving that they observed such high
level of diligence. In this case, E Shipping
failed to hurdle such burden. [Eastern
Shipping Lines v. BPI/MS Insurance
Corporation, G.R. No. 193986, 15 January
2014]

Yes. It is settled in maritime law


jurisprudence that cargoes while being
unloaded generally remain under the
custody of the carrier. Based evidence
presented, the goods were damaged
even before they were turned over to the
stevedore. Such damage was even
compounded by the negligent acts of E
Shipping and the Stevedore which both
mishandled the goods during the
discharging operations. Thus, it bears
stressing unto E Shipping that common
carriers, from the nature of their business
and for reasons of public policy, are
bound to observe extraordinary diligence
in the vigilance over the goods
transported by them. Subject to certain
exceptions enumerated under Article
1734 of the Civil Code, common carriers
are responsible for the loss, destruction,
or deterioration of the goods. The
extraordinary
responsibility
of
the
common carrier lasts from the time the
goods are unconditionally placed in the
possession of, and received by the carrier
for transportation until the same are
delivered, actually or constructively, by
the carrier to the consignee, or to the
person who has a right to receive them.
Owing to this high degree of diligence
required of them, common carriers, as a

3. R made travel reservations with


S Travel for his familys trip to
Australia. Upon booking and
confirmation
of
his
flight
schedule, R paid the airfare and
was
issued
Cathay
Pacific
round-trip plane tickets for
Manila-HongKong-AdelaideHongKong-Manila. Their flight
to Australia went smoothly.
Before the flight back to
Manila,
the
booking
was
reconfirmed and it was said
that the reservation was still
Ok as scheduled. They were
only able to take a flight out
back to Manila on the next day.
When R and his family were at
the airport to catch the flight
back to Manila, they were
informed by S Travel that they
did
not
have
confirmed
reservations. Cathay, however,
said that S Travel failed to
input the ticket numbers of R,
and made fictitious bookings
for the other members of Rs
family.
In
Manila,
R
was
informed that it was Cathay
that cancelled the bookings. A
complaint for damages was

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filed against Cathay and S


Travel. Can Cathay and S Travel
be held liable?
The determination of whether or not the
award of damages is correct depends on
the nature of Rs contractual relations
with Cathay Pacific and S Travel. The
cause of action against Cathay Pacific
stemmed from a breach of contract of
carriage. A contract of carriage is defined
as one whereby a certain person or
association
of
persons
obligate
themselves to transport persons, things,
or news from one place to another for a
fixed price. Under Article 1732 of the Civil
Code, this "persons, corporations, firms,
or associations engaged in the business
of carrying or transporting passengers or
goods or both, by land, water, or air, for
compensation, offering their services to
the public" is called a common carrier.
R and his family entered into a contract
of carriage with Cathay Pacific. As far as
R and his family are concerned, they were
holding valid and confirmed airplane
tickets. The ticket in itself is a valid
written contract of carriage whereby for a
consideration, Cathay Pacific undertook
to carry respondents in its airplane for a
round-trip flight from Manila to Adelaide,
Australia and then back to Manila. In fact,
R called the Cathay Pacific office before
his return flight to re-confirm his booking.
He was even assured by a staff of Cathay
Pacific that he does not need to reconfirm
his booking. Cathay Pacific breached its
contract of carriage with respondents
when it disallowed them to board the
plane to go back to Manila on the date
reflected on their tickets. Thus, Cathay
Pacific opened itself to claims for
compensatory,
actual,
moral
and
exemplary damages, attorneys fees and
costs of suit.
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In contrast, the contractual relation


between S Travel and R is a contract for
services. The object of the contract is
arranging and facilitating the latters
booking and ticketing. It was even S
Travel which issued the tickets. Since the
contract between the parties is an
ordinary one for services, the standard of
care required of respondent is that of a
good father of a family under Article 1173
of the Civil Code. This connotes
reasonable care consistent with that
which an ordinarily prudent person would
have observed when confronted with a
similar situation. The test to determine
whether
negligence
attended
the
performance of an obligation is: did the
defendant in doing the alleged negligent
act use that reasonable care and caution
which an ordinarily prudent person would
have used in the same situation? If not,
then he is guilty of negligence. There was
indeed failure on the part of S Travel to
exercise due diligence in performing its
obligations
under the contract of
services. It was established by Cathay
Pacific, that S Travel failed to input the
correct ticket number for Rs ticket.
Cathay Pacific even asserted that S Travel
made two fictitious bookings for the
members of Rs family. The negligence of
S Travel renders it also liable for
damages. [Cathay Pacific Airways v.
Juanita Reyes, et al., G.R. No. 185891,
June 26, 2013]

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Insurance Law
1. In a CBA, it was provided that
the employer will shoulder
hospitalization expenses of the
dependents
of
covered
employees subject to certain
limitations
and
restrictions.
Accordingly,
covered
employees pay part of the
hospitalization
insurance
premium
through
monthly
salary deductions while the
company, upon hospitalization
of the covered employees'
dependents,
shall
pay
the
hospitalization
expenses
incurred for the same. The
conflict arose when a portion of
the hospitalization expenses of
the
covered
employees'
dependents
were
paid/shouldered
by
the
dependent's
own
health
insurance. While the company
refused to pay the portion of
the hospital expenses already
shouldered by the dependents'
own health
insurance,
the
union insists that the covered
employees are entitled to the
whole
and
undiminished
amount
of
said
hospital
expenses. Decide.
The covered employees are not entitled
to full payment of the hospital expenses
incurred by their dependents, including
the amounts already paid by other health
insurance companies based on the theory
of collateral source rule.
As part of American personal injury law,
the collateral source rule was originally
applied to tort cases wherein the
defendant is prevented from benefiting
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Commercial Law

from the plaintiffs receipt of money from


other sources. Under this rule, if an
injured person receives compensation for
his injuries from a source wholly
independent of the tortfeasor, the
payment should not be deducted from
the damages which he would otherwise
collect from the tortfeasor. In a recent
Decision by the Illinois Supreme Court,
the rule has been described as an
established exception to the general rule
that damages in negligence actions must
be compensatory. The Court went on to
explain that although the rule appears to
allow a double recovery, the collateral
source will have a lien or subrogation
right to prevent such a double recovery.
The collateral source rule applies in order
to place the responsibility for losses on
the party causing them. Its application is
justified so that the wrongdoer should
not benefit from the expenditures made
by the injured party or take advantage of
contracts or other relations that may
exist between the injured party and third
persons. Thus, it finds no application to
cases involving no-fault insurances under
which the insured is indemnified for
losses
by
insurance
companies,
regardless of who was at fault in the
incident generating the losses. Here, it is
clear that the employer is a no-fault
insurer. Hence, it cannot be obliged to
pay the hospitalization expenses of the
dependents of its employees which had
already been paid by separate health
insurance providers of said dependents.
[Mitsubishi Motors Philippines Salaried
Employees Union v. Mitsubishi Motors
Philippines Corporation, G.R. No. 175773,
June 17, 2013]
2. M
Insurer
insured
PAPs
machineries
and
equipment
against fire, for a period of one
2013 & 2014 Q and A|

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year, for the amount of 15


million
pesos.
This
was
procured
by
PAP
for
its
mortgagee,
RCBC.
The
insurance policy was renewed
before the lapse of one year, on
an as is basis, and it was
agreed that the things insured
will not be moved to another
location, without the consent of
M insurer. The machineries and
equipment were thereafter lost
in a fire, which prompted PAP
to claim from M insurer. The
claim was denied on the ground
that the things insured were
transferred
to
a
different
location from that indicated in
the policy. Can M insurer be
held liable for the loss?
No. Here, by the clear and express
condition in the renewal policy, the
removal of the insured property to any
building or place required the consent of
the insurer. Any transfer effected by the
insured, without the insurers consent,
would free the latter from any liability.
Considering that the original policy was
renewed on an as is basis, it follows
that the renewal policy carried with it the
same stipulations and limitations. The
terms and conditions in the renewal
policy provided, among others, that the
location of the risk insured against is at
PAPs factory. The subject insured
properties, however, were totally burned
at another factory. Although it was also
located in the same area, the other
factory was not the location stipulated in
the renewal policy. There being an
unconsented removal, the transfer was at
PAPs own risk. Consequently, it must
suffer the consequences of the fire. Thus,
the Court agrees with the report of an
international
loss
adjuster
which
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Commercial Law

investigated the fire incident at the other


factory, which opined that [g]iven that
the location of risk covered under the
policy is not the location affected, the
policy will, therefore, not respond to this
loss/claim. It can also be said that with
the transfer of the location of the subject
properties, without notice and without M
insurers consent, after the renewal of the
policy,
PAP
clearly
committed
concealment, misrepresentation and a
breach of a material warranty.
Accordingly, an insurer can exercise its
right to rescind an insurance contract
when the following conditions are
present, to wit:
1) the policy limits the use or condition
of the thing insured;
2) there is an alteration in said use or
condition;
3) the alteration is without the consent
of the insurer;
4) the alteration is made by means
within the insureds control; and
5) the alteration increases the risk of
loss.
In the case at bench, all these
circumstances are present. It was clearly
established that the renewal policy
stipulated that the insured properties
were located at PAPs factory; that PAP
removed the properties without the
consent of M insurer; and that the
alteration of the location increased the
risk
of
loss.
[Malayan
Insurance
Company, Inc. v. PAP co., Ltd. (Philippine
Branch), G.R. No. 200784, August 7,
2013]
3. M Insurance issued a life
insurance policy covering the
life of S, with A as beneficiary.
More than two years after the
insurance was issued, S died,
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thus, A filed a claim for the


proceeds. The claim was denied
because
the
claim
was
spurious, as it appeared after
its investigation that S did not
actually apply for insurance
coverage,
was
unlettered,
sickly, and had no visible
source of income to pay for the
insurance premiums; and that A
was an impostor, posing as S
and
fraudulently
obtaining
insurance in the latters name
without her knowledge and
consent. Can M Insurance deny
the claim?
No. "Fraudulent intent on the part of the
insured must be established to entitle the
insurer to rescind the contract." In the
absence of proof of such fraudulent
intent, no right to rescind arises. There
being no evidence that there was indeed
fraud, except for the self-serving result of
M Insurances investigation, then the
claim cannot be denied.
Also, Section 48 of the Insurance Code
will prevent the insurer from barring the
claim. The results and conclusions arrived
at during the investigation conducted
unilaterally by petitioner after the claim
was filed may simply be dismissed as
self-serving and may not form the basis
of a cause of action given the existence
and application of Section 48, which
provides that if the life insurance policy
has been in force for at least two years
from its date of issuance, the insurer
cannot deny the claim on the ground of
concealment or misrepresentation by the
insured.
Section 48 serves a noble purpose, as it
regulates the actions of both the insurer
and the insured. Under the provision, an
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Commercial Law

insurer is given two years from the


effectivity of a life insurance contract and
while the insured is alive to discover or
prove that the policy is void ab initio or is
rescindible by reason of the fraudulent
concealment or misrepresentation of the
insured or his agent. After the two-year
period lapses, or when the insured dies
within the period, the insurer must make
good on the policy, even though the
policy
was
obtained
by
fraud,
concealment, or misrepresentation. This
is not to say that insurance fraud must be
rewarded,
but
that
insurers
who
recklessly and indiscriminately solicit and
obtain business must be penalized, for
such
recklessness
and
lack
of
discrimination ultimately work to the
detriment of bona fide takers of insurance
and the public in general.
Section 48 prevents a situation where the
insurer knowingly continues to accept
annual premium payments on life
insurance, only to later on deny a claim
on the policy on specious claims of
fraudulent
concealment
and
misrepresentation, such as what obtains
in the instant case. Thus, instead of
conducting at the first instance an
investigation into the circumstances
surrounding the issuance of the subject
insurance policy which would have timely
exposed
the
supposed
flaws
and
irregularities attending it as it now
professes, M Insurance appears to have
turned a blind eye and opted instead to
continue collecting the premiums on the
policy. For nearly three years, the insurer
collected the premiums and devoted the
same to its own profit. It cannot now deny
the claim when it is called to account.
Section 48 must be applied to it with full
force and effect. [Manila Bankers v.
Crisencia Aban, GR No. 175666, July 29,
2013]
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4. V Corp operated a tanker which


was chartered by C Inc. to
transport
petroleum.
The
petroleum was insured by AHA
Co. however, during the course
of the voyage, the tanker
collided with another vessel
and sank
along with the
petroleum. AHA Co. indemnified
C Inc. for the loss, and later
sued V Corp for reimbursement.
What is the prescriptive period
for
filing
an
action
for
reimbursement by the insurer
as a result of subrogation?
The cause of action of the insurer is one
which arose out of subrogation by virtue
of Article 2207 of the Civil Code, which is
based upon an obligation created by law.
It comes under Article 1194(2) of the Civil
Code and prescribes in ten years. [Vector
Shipping v. American Home Insurance,
GR No. 159213, 3 July 2013]
N.B. If there is a period within which the
insured can file a claim with the
wrongdoer, the subrogated insurance
company is also bound by such period.
The subrogated insurance company
stands in the place and in substitution of
the consignee. [Federal Express v.
American Home Assurance, G.R. No.
150094, August 18, 2004]
5. R insured her car with P Insurer
in case of loss or damage
thereto. The car was to be
taken to an auto shop by Rs
driver, but the driver no longer
return. After efforts to find it
failed, R notified the insurer of
the loss. The claim of R against
the insurer was denied because
of a provision in the policy
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Commercial Law

which exempts the insurer from


liability
in
case
malicious
damage to the car was caused
by the employee of the insured.
Can the insurer deny Rs claim
on such ground?
No. A contract of insurance is a contract
of adhesion. When the terms of the
insurance contract contain limitations on
liability, courts should construe them in
such a way as to preclude the insurer
from non-compliance with his obligation.
The words "loss" and "damage" mean
different things in common ordinary
usage. The word "loss" refers to the act
or fact of losing, or failure to keep
possession, while the word "damage"
means deterioration or injury to property.
Therefore, the insurer cannot exclude the
loss of vehicle under the exceptions in
the insurance policy since the same
refers only to "malicious damage," or
more specifically, "injury" to the motor
vehicle caused by a person under the
insureds service. It clearly does not
contemplate "loss of property," as what
happened in the instant case.
"Malicious damage," as provided for in
the subject policy as one of the
exceptions from coverage, is the damage
that is the direct result from the
deliberate or willful act of the insured,
members of his family, and any person in
the insureds service, whose clear plan or
purpose was to cause damage to the
insured
vehicle
for
purposes
of
defrauding the insurer
Theft perpetrated by a driver of the
insured is not an exception to the
coverage from the insurance policy
subject of this case. This is evident from
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the very provision of the insurance policy.


The insurance company, subject to the
limits of liability, is obligated to indemnify
the insured against theft. Said provision
does not qualify as to who would commit
the theft. Thus, even if the same is
committed by the driver of the insured,
there being no categorical declaration of
exception, the same must be covered.
"(A)n insurance contract should be
interpreted as to carry out the purpose
for which the parties entered into the
contract which is to insure against risks of
loss or damage to the goods. Such
interpretation should result from the
natural and reasonable meaning of
language in the policy. Where restrictive
provisions
are
open
to
two
interpretations, that which is most
favorable to the insured is adopted." The
defendant would argue that if the person
employed by the insured would commit
the theft and the insurer would be held
liable, then this would result to an absurd
situation where the insurer would also be
held liable if the insured would commit
the theft. This argument is certainly
flawed. Of course, if the theft would be
committed by the insured himself, the
same would be an exception to the
coverage since in that case there would
be fraud on the part of the insured or
breach of material warranty under
Section 69 of the Insurance Code.
Indemnity and liability insurance policies
are construed in accordance with the
general rule of resolving any ambiguity
therein in favor of the insured, where the
contract or policy is prepared by the
insurer. A contract of insurance, being a
contract of adhesion, par excellence, any
ambiguity therein should be resolved
against the insurer; in other words, it
should be construed liberally in favor of
the insured and strictly against the
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Commercial Law

insurer. Limitations of liability should be


regarded with extreme jealousy and must
be construed in such a way as to
preclude the insurer from non-compliance
with its obligations. [Alpha Insurance and
Surety Co. v. Arsenia Sonia Castor, G.R.
No. 198174, September 2, 2013]
6. A was a health insurance policy
holder of M Inc. He underwent
emergency
medical
appendectomy causing him to
incur medical expenses while in
the US. However, M In. only
approved reimbursement of a
portion of the expenses, which
was based on the average cost
of the procedure if done in
Manila. With the denial of his
claim for reimbursement, A
filed a complaint for breach of
contract against M Inc. Should
the action prosper?
Yes. M Inc.s liability to A under the
subject Health Care Contract should be
based on the expenses for hospital and
professional fees which he actually
incurred, and should not be limited by the
amount that he would have incurred had
his emergency treatment been performed
in an accredited hospital in the
Philippines. . For
purposes
of
determining the liability of a health care
provider to its members, jurisprudence
holds that a health care agreement is in
the nature of non-life insurance, which
is primarily a contract of indemnity.
Once the member incurs hospital,
medical or any other expense arising
from sickness, injury or other stipulated
contingent, the health care provider must
pay for the same to the extent agreed
upon under the contract. that a health
care agreement is in the nature of a nonlife insurance. It is an established rule in
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insurance contracts that when their terms


contain limitations on liability, they
should be construed strictly against the
insurer. These are contracts of adhesion
the terms of which must be interpreted
and enforced stringently against the
insurer which prepared the contract. This
doctrine is equally applicable to health
care agreements. L]imitations of liability
on the part of the insurer or health care
provider must be construed in such a way
as to preclude it from evading its
obligations. Accordingly, they should be
scrutinized by the courts with "extreme
jealousy" and "care" and with a
"jaundiced eye. [Fortune Medicare, Inc. v.
David Robert U. Amorin, G.R. No. 195872,
March 12, 2014]
7. What is Microinsurance?
Microinsurance is an activity providing
specific insurance, insurance-like and
other similar products and services that
meet the needs of the low-income sector
for risk protection and relief against
distress, misfortune and other contingent
events. This shall include all forms of
insurance, insurance-like and other
similar activities with the following
features:

a. The
amount
of
premiums,
contributions, fees or charges,
computed on a daily basis, does not
exceed 5% of the current daily
minimum wage rate for nonagricultural
workers
in
Metro
Manila; and
b. The maximum sum of guaranteed
benefits is not more than 500 times
the daily minimum wage rate for
non-agricultural workers in Metro
Manila.
All insurance companies, cooperative
insurance societies and mutual benefit
associations licensed by the Insurance
Commissioner
may
provide
microinsurrance products and services
following prescribed regulatory and
prudential
requirements.
[Insurance
Memorandum Circular No. 1-2010, 29
January 2010]

a. Premiums, contributions, fees or


charges are collected or deducted
prior to the occurrence of a
contingent event; and
b. Guaranteed benefits are provided
upon occurrence of a contingent
event.
Insurance
companies
offering
microinsurance will have a something
called a microinsurance product which
is a financial product or service that
meets the risk protection needs of the
poor where:
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Commercial Law

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Intellectual Property Laws


1. HIPOLITO & SEA HORSE &
TRIANGULAR DEVICE," "FAMA,"
and other related marks were
owned by CH S.A. of Portugal to
designate kerosene burners. L
claimed that the true owner of
the marks G corp. assigned
them to him. However, he
claimed
that
he
bought
kerosene burners from W Corp.
with the subject marks and
indicated thereon that they
were made in Portugal. He thus
filed a complaint against W
Corp. and its officers for false
designation of origin. Can W
Corp. be held liable?
Yes. W Corp. did not have authority from
CH S.A. to place the words Made in
Portugal and Original Portugal with the
trademarks on the burners produced in
the Philippines. W Corp. placed the words
"Made in Portugal" and "Original Portugal"
with the disputed marks knowing fully
well because of their previous dealings
with the Portuguese company that
these were the marks used in the
products of CH S.A. Portugal. More
importantly, the products that W Corp.
sold were admittedly produced in the
Philippines, with no authority CH S.A.
Portugal. The law on trademarks and
trade names precisely precludes a person
from
profiting
from
the
business
reputation built by another and from
deceiving the public as to the origins of
products. [Uyco v. Lo, G.R. No. 202423,
January 28, 2013]
2. Levis Inc. was a licensee of
Levis, a US Corporation owner
of trademarks and designs of
Levis
Jeans.
It
received
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Commercial Law

information that D was selling


counterfeit Levis jeans, and
with the help of the NBI, had
seized from Ds shop several
fake Levis jeans, with the
trademark
LS
JEANS
TAILORING. It charged D with
the
crime
of
trademark
infringement. Is D guilty of
infringement?
No. The elements of the offense of
trademark infringement under the
Intellectual Property Code are, therefore,
the following:
1. The trademark being infringed is
registered
in
the
Intellectual
Property Office;
2. The trademark is reproduced,
counterfeited, copied, or colorably
imitated by the infringer;
3. The infringing mark is used in
connection with the sale, offering
for sale, or advertising of any
goods, business or services; or the
infringing mark is applied to labels,
signs, prints, packages, wrappers,
receptacles
or
advertisements
intended to be used upon or in
connection
with
such
goods,
business or services;
4. The use or application of the
infringing mark is likely to cause
confusion or mistake or to deceive
purchasers or others as to the
goods or services themselves or as
to the source or origin of such
goods or services or the identity of
such business; and
5. The use or application of the
infringing mark is without the
consent of the trademark owner or
the assignee thereof.
The gravamen of the offense is he
likelihood of confusion. There are two
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tests to determine
likelihood of
confusion, namely: the dominancy test,
and the holistic test. The holistic test is
applicable here considering that the
herein criminal cases also involved
trademark infringement in relation to
jeans products. Accordingly, the jeans
trademarks of Levis and D must be
considered as a whole in determining the
likelihood of confusion between them.
The jeans made and sold by Levis, were
very popular in the Philippines. The
consuming public knew that the original
Levis jeans were under a foreign brand
and quite expensive. Such jeans could be
purchased only in malls or boutiques as
ready-to-wear items, and were not
available in tailoring shops like those of
Ds as well as not acquired on a madeto-order basis. Under the circumstances,
the consuming public could easily discern
if the jeans were original or fake Levis
jeans, or were manufactured by other
brands of jeans. D used the trademark
LS JEANS TAILORING for the jeans he
produced and sold in his tailoring shops.
His trademark was visually and aurally
different from the trademark LEVI
STRAUSS & CO appearing on the patch
of original jeans under the trademark
LEVIS. The word LS could not be
confused as a derivative from LEVI
STRAUSS by virtue of the LS being
connected to the word TAILORING,
thereby openly suggesting that the jeans
bearing the trademark LS JEANS
TAILORING came or were bought from
the tailoring shops of D, not from the
malls or boutiques selling original Levis
jeans to the consuming public. [Diaz v.
People, G.R. No. 180677, 18 February
2013]

Yes. Foreign marks which are not


registered are still accorded protection
against
infringement
and/or
unfair
competition. Under the Paris Convention,
the Philippines is obligated to assure
nationals of the signatory-countries that
they are afforded an effective protection
against violation of their intellectual
property rights in the Philippines in the
same way that their own countries are
obligated to accord similar protection to
Philippine
nationals.
Thus,
under
Philippine law, a trade name of a national
of a State that is a party to the Paris
Convention, whether or not the trade
name forms part of a trademark, is
protected without the obligation of filing
or registration.

3. A French partnership filed with


the IPO a trademark application
for the mark "LE CORDON BLEU

The present law on trademarks, Republic


Act No. 8293, otherwise known as the
Intellectual
Property
Code
of
the

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Commercial Law

& DEVICE". This was opposed


by Ecole alleging that it was
the owner of the mark "LE
CORDON
BLEU,
ECOLE
DE
CUISINE MANILLE," which it has
been using since 1948 in
cooking and other culinary
activities,
including
in
its
restaurant business, it has
earned immense and invaluable
goodwill such that Cointreaus
use of the subject mark will
actually
create
confusion,
mistake, and deception to the
buying public as to the origin
and sponsorship of the goods,
and
cause
great
and
irreparable injury and damage
to Ecoles business reputation
and goodwill as a senior user of
the same. Can the said mark of
the
French
partnership
be
registered?

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Philippines, as amended, has already


dispensed with the requirement of prior
actual use at the time of registration.
Thus, there is more reason to allow the
registration of the subject mark under the
name of the French partnership as its true
and lawful owner.
The function of a trademark is to point
out distinctly the origin or ownership of
the goods (or services) to which it is
affixed; to secure to him, who has been
instrumental in bringing into the market a
superior article of merchandise, the fruit
of his industry and skill; to assure the
public that they are procuring the
genuine article; to prevent fraud and
imposition;
and
to
protect
the
manufacturer against substitution and
sale of an inferior and different article as
his product. As such, courts will protect
trade names or marks, although not
registered or properly selected as
trademarks, on the broad ground of
enforcing justice and protecting one in
the fruits of his toil. [Ecole De Cuisine
Manille (Cordon Bleu of the Philippines),
Inc. v. Renaud Cointreau & CIE and Le
Condron Bleu Intl., B.V., G.R. No. 185830,
June 5, 2013]
4. F Manufacturing filed a case
against
Harvard
U,
an
educational corporation in the
US, for the cancellation of its
registration of trademark. It
alleged that since 1995, it had
used the trademark Harvard
for its goods, for which its
predecessor had secured a
certificate of registration with
the
IPO.
Can
the
action
prosper?

allowed because Section 4(a) of R.A. No.


166 prohibits the registration of a mark
"which may disparage or falsely suggest
a connection with persons, living or dead,
institutions, beliefs x x x." its use of the
mark "Harvard," coupled with its claimed
origin in the US, obviously suggests a
false connection with Harvard University.
On this ground alone, F Manufacturings
registration of the mark "Harvard" should
have been disallowed.
Also, the Philippines and the United
States of America are both signatories to
the Paris Convention for the Protection of
Industrial Property (Paris Convention).
The Philippines became a signatory to the
Paris Convention on 27 September 1965.
The Philippines is obligated to assure
nationals of countries of the Paris
Convention that they are afforded an
effective protection against violation of
their intellectual property rights in the
Philippines in the same way that their
own countries are obligated to accord
similar protection to Philippine nationals.
Thus, under Philippine law, a trade name
of a national of a State that is a party to
the Paris Convention, whether or not the
trade name forms part of a trademark, is
protected "without the obligation of filing
or registration."
Indeed, Section 123.1(e) of R.A. No. 8293
now categorically states that "a mark
which is considered by the competent
authority of the Philippines to be wellknown
internationally
and
in
the
Philippines, whether or not it is registered
here," cannot be registered by another in
the Philippines. Section 123.1(e) does not
require that the well-known mark be used
in commerce in the Philippines but only
that it be well-known in the Philippines.

No. F Manufacturings registration of the


mark "Harvard" should not have been
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In determining whether a mark is wellknown, the following criteria or any


combination thereof may be taken into
account:
(a) the
duration,
extent
and
geographical area of any use of the
mark, in particular, the duration,
extent and geographical area of
any promotion of the mark,
including advertising or publicity
and the presentation, at fairs or
exhibitions, of the goods and/or
services to which the mark applies;
(b)the market share, in the Philippines
and in other countries, of the goods
and/or services to which the mark
applies;
(c) the degree of the inherent or
acquired distinction of the mark;
(d)the quality-image or reputation
acquired by the mark;
(e) the extent to which the mark has
been registered in the world;
(f) the exclusivity
of
registration
attained by the mark in the world;
(g)the extent to which the mark has
been used in the world;
(h)the exclusivity of use attained by
the mark in the world;
(i) the commercial value attributed to
the mark in the world;
(j) the record of successful protection
of the rights in the mark;
(k) the outcome of litigations dealing
with the issue of whether the mark
is a well-known mark; and
(l) the presence or absence of
identical or similar marks validly
registered for or used on identical
or similar goods or services and
owned by persons other than the
person claiming that his mark is a
well-known mark.
Since "any combination" of the foregoing
criteria is sufficient to determine that a
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Commercial Law

mark is well-known, it is clearly not


necessary that the mark be used in
commerce in the Philippines. Thus, while
under the territoriality principle a mark
must be used in commerce in the
Philippines to be entitled to protection,
internationally well-known marks are the
exceptions to this rule.
Thus, the trademark of Harvard U, even if
not registered here, is still entitled to
protection. "Harvard" is the trade name
of the world famous Harvard University,
and it is also a trademark of Harvard
University. Under Article 8 of the Paris
Convention, as well as Section 37 of R.A.
No. 166, Harvard University is entitled to
protection in the Philippines of its trade
name "Harvard" even without registration
of such trade name in the Philippines.
This means that no educational entity in
the Philippines can use the trade name
"Harvard" without the consent of Harvard
University. Likewise, no entity in the
Philippines can claim, expressly or
impliedly through the use of the name
and mark "Harvard," that its products or
services are authorized, approved, or
licensed by, or sourced from, Harvard
University without the latter's consent.
[Fredco Manufacturing v. President and
Fellows of Harvard College, GR No.
185917, 1 June, 2011]
5. B Corp. was a German company
who
applied
for
various
trademark registrations with
the IPO, which included the
mark Birkenstock. However,
registration proceedings were
halted because the IPO found
an existing registration for the
mark Birkenstock and Device,
in the name of S Corp.
predecessor of PS Marketing.
But, PS Marketing did not file a
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declaration of actual use (DAU)


of the said marks. Should the
registration of B corp. be
allowed?
Yes. The law requires the filing of a DAU
on specified periods, and failure to file
the DAU within the requisite period
results in the automatic cancellation of
registration of a trademark. In turn, such
failure is tantamount to the abandonment
or withdrawal of any right or interest the
registrant has over his trademark. Also, it
must be emphasized that registration of a
trademark, by itself, is not a mode of
acquiring ownership. If the applicant is
not the owner of the trademark, he has
no right to apply for its registration.
Registration merely creates a prima facie
presumption of the validity of the
registration, of the registrants ownership
of the trademark, and of the exclusive
right
to
the
use
thereof.
Such
presumption, just like the presumptive
regularity in the performance of official
functions, is rebuttable and must give
way to evidence to the contrary.
Clearly, it is not the application or
registration of a trademark that vests
ownership thereof, but it is the ownership
of a trademark that confers the right to
register the same. A trademark is an
industrial property over which its owner is
entitled to property rights which cannot
be appropriated by unscrupulous entities
that, in one way or another, happen to
register such trademark ahead of its true
and lawful owner. The presumption of
ownership accorded to a registrant must
then necessarily yield to superior
evidence of actual and real ownership of
a trademark.
In the instant case, B Corp. is the owner
of the mark "BIRKENSTOCK." There is
Starr Weigand 2014
Commercial Law

evidence relating to the origin and history


of "BIRKENSTOCK" and its use in
commerce long before respondent was
able to register the same here in the
Philippines. It has been sufficiently
proven that "BIRKENSTOCK" was first
adopted in Europe in 1774 by its inventor,
Johann Birkenstock, a shoemaker, on his
line of quality footwear and thereafter,
numerous
generations
of
his
kin
continuously engaged in the manufacture
and sale of shoes and sandals bearing the
mark "BIRKENSTOCK" until it became the
entity now known as the petitioner.
Petitioner
also
submitted
various
certificates of registration of the mark
"BIRKENSTOCK" in various countries and
that it has used such mark in different
countries
worldwide,
including
the
Philippines. This being the case, B Corp.
is the true and lawful owner of the mark
"BIRKENSTOCK" and entitled to its
registration, and that PS Marketing was in
bad faith in having it registered in its
name. [Birkenstock Orthopaedie GMBH
and Co. KG v. Philippine Shoe Expo
Maarketing, G.R. No. 194307, November
20, 2013]
6. P Corp and S Corp supply and
produce LPG in the Philippines.
P Corp is the registered owner
of the trademarks Gasul and
Gasul cylinders, while S Corp
was the authorized user of
Shellane
and
Shellane
cylinders in the Philippines.
With the help of the NBI, it was
found that R Corp was engaged
in the refilling and sale of LPG
cylinders
bearing
the
registered marks of the P Corp
and S Corp without authority
from the latter. Can R Corp be
held liable for infringement of

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trademark
competition?

and

unfair

Yes. The mere unauthorized use of a


container bearing a registered trademark
in connection with the sale, distribution or
advertising of goods or services which is
likely to cause confusion, mistake or
deception
among
the
buyers
or
consumers
can
be
considered
as
trademark infringement. In the instant
case, R Corp committed trademark
infringement when they refilled, without
the consent of P Corp and S Corp, the LPG
containers bearing the latters registered
marks. R Corps acts will inevitably
confuse the consuming public, since they
have no way of knowing that the gas
contained in the LPG tanks bearing the
marks of P Corp and S Corp is in reality
not the latters LPG product after the
same had been illegally refilled. The
public will then be led to believe that R
Corp
are
authorized
refillers
and
distributors
of
the
LPG
products,
considering that they are accepting
empty containers P Corp and S Corp, and
refilling them for resale.
Unfair competition has been defined as
the passing off (or palming off) or
attempting to pass off upon the public of
the goods or business of one person as
the goods or business of another with the
end and probable effect of deceiving the
public. Passing off (or palming off) takes
place where the defendant, by imitative
devices on the general appearance of the
goods, misleads prospective purchasers
into buying his merchandise under the
impression that they are buying that of
his competitors. Thus, the defendant
gives his goods the general appearance
of the goods of his competitor with the
intention of deceiving the public that the
goods are those of his competitor. In the
Starr Weigand 2014
Commercial Law

present case, P Corp and S Corp


pertinently observed that by refilling and
selling LPG cylinders bearing their
registered marks, R Corp was selling
goods by giving them the general
appearance
of
goods
of
another
manufacturer. There is a showing that the
consumers may be misled into believing
that the LPGs contained in the cylinders
bearing
the
marks
"GASUL"
and
"SHELLANE" are those goods or products
of the P Corp and S Corps when, in fact,
they are not. Obviously, the mere use of
those
LPG
cylinders
bearing
the
trademarks "GASUL" and "SHELLANE" will
give the LPGs sold by R Corp the general
appearance of the products of the P Corp
and S Corp. [Republic Gas Corporation v.
Petron Corporation and Plipinas Shell,
G.R. No. 194062, June 17, 2013]
7. S Corp. filed an application for
the issuance of search warrant
to search a warehouse of IPI,
alleging that the latter engaged
in infringement of trademark.
Upon implementation of the
warrant, it was found that
there were more than 6,000
pairs of shoes bearing S Corps
registered trademark (stylized
S with an oval design). Was
there infringement?
Yes. There is colorable imitation between
the shoes of IPI and S Corp. The essential
element of infringement under R.A. No.
8293 is that the infringing mark is likely
to cause confusion. In determining
similarity and likelihood of confusion,
jurisprudence has developed tests: the
Dominancy Test and the Holistic or
Totality Test.
The Dominancy Test focuses on the
similarity of the prevalent or dominant
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features of the competing trademarks


that might cause confusion, mistake, and
deception in the mind of the purchasing
public. Duplication or imitation is not
necessary; neither is it required that the
mark sought to be registered suggests an
effort
to
imitate.
Given
more
consideration are the aural and visual
impressions created by the marks on the
buyers of goods, giving little weight to
factors like prices, quality, sales outlets,
and market segments.
In contrast, the Holistic or Totality Test
necessitates a consideration of the
entirety of the marks as applied to the
products, including the labels and
packaging, in determining confusing
similarity. The discerning eye of the
observer must focus not only on the
predominant words, but also on the other
features appearing on both labels so that
the observer may draw conclusion on
whether one is confusingly similar to the
other.
Relative to the question on confusion of
marks and trade names, jurisprudence
has noted two (2) types of confusion, viz.:
(1)
confusion
of
goods
(product
confusion), where the ordinarily prudent
purchaser would be induced to purchase
one product in the belief that he was
purchasing the other; and (2) confusion of
business (source or origin confusion),
where, although the goods of the parties
are different, the product, the mark of
which registration is applied for by one
party, is such as might reasonably be
assumed to originate with the registrant
of an earlier product, and the public
would then be deceived either into that
belief or into the belief that there is some
connection between the two parties,
though inexistent.

Starr Weigand 2014


Commercial Law

Applying the Dominancy Test to the case


at bar, this Court finds that the use of the
stylized "S" by IPI in its shoes infringes on
the mark already registered by S Corp.
with the IPO. While it is undisputed that S
Corp.s stylized "S" is within an oval
design, to this Court's mind, the
dominant feature of the trademark is the
stylized "S," as it is precisely the stylized
"S" which catches the eye of the
purchaser. Thus, even if IPI did not use an
oval design, the mere fact that it used the
same stylized "S", the same being the
dominant feature of S Copr.'s trademark,
already constitutes infringement under
the Dominancy Test. [Sketchers USA v.
Inter Pacific Industrial, GR No. 164321,
Marche 23, 2011]
8. EYIS
corp.,
a
Philippine
company,
distributes
air
conditioners
and
other
industrial tools and equipment.
SD corp., on the other hand, is
a Taiwanese company engaged
in the manufacture of air
compressors. Both claimed to
have the right to register the
trademark
"VESPA"
for air
compressors. EYIS buys air
compressors from SD, but the
documents do not show that
the said goods were marked as
VESPA. EYIS was able to
register the mark VESPA with
the IPO. A month later, SD was
also granted registration. SD
filed a petition to cancel EYIS
registration. Who is the true
owner of the mark?
EYIS must be considered as the prior and
continuous user of the mark "VESPA" and
its true owner. Hence, EYIS is entitled to
the registration of the mark in its name.
the registration of a mark is prevented
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with the filing of an earlier application for


registration. This must not, however, be
interpreted to mean that ownership
should be based upon an earlier filing
date. While RA 8293 removed the
previous requirement of proof of actual
use prior to the filing of an application for
registration of a mark, proof of prior and
continuous use is necessary to establish
ownership of a mark. Such ownership
constitutes sufficient evidence to oppose
the registration of a mark. Sec. 134 of the
IP Code provides that "any person who
believes that he would be damaged by
the registration of a mark x x x" may file
an opposition to the application. The term
"any person" encompasses the true
owner of the mark the prior and
continuous user. Notably, the Court has
ruled that the prior and continuous use of
a mark may even overcome the
presumptive ownership of the registrant
and be held as the owner of the mark. By
itself, registration is not a mode of
acquiring ownership. When the applicant
is not the owner of the trademark being
applied for, he has no right to apply for
registration of the same. Registration
merely creates a prima facie presumption
of the validity of the registration, of the
registrants ownership of the trademark
and of the exclusive right to the use
thereof. Such presumption, just like the
presumptive
regularity
in
the
performance of official functions, is
rebuttable and must give way to
evidence to the contrary. In the instant
case, EYIS is the prior user of the mark,
and is thus the true owner thereof. [E.Y.
Industrial Sales v. Shen Dar Electricity
and Machinery Co. Ltd., GR No. 184850,
20 October 2010]
9. M Pharmaceuticals registered
Dermalin as its trademark.
Thereafter, D Inc. sought to
Starr Weigand 2014
Commercial Law

have Dermaline registered as


a trademark under its name.
this was opposed to be M
Pharmaceuticals allegeing that
registration by D Inc. will likely
cause confusion, mistake and
deception to the purchasing
public, as the trademark sought
to be registered by D Inc. so
resembles
its
trademark,
Dermalin. Can the trademark
Dermaline be registered?
No. While there are no set rules that can
be deduced as what constitutes a
dominant feature with respect to
trademarks applied for registration;
usually, what are taken into account are
signs, color, design, peculiar shape or
name,
or
some
special,
easily
remembered earmarks of the brand that
readily attracts and catches the attention
of the ordinary consumer. Verily, when
one applies for the registration of a
trademark or label which is almost the
same or that very closely resembles one
already used and registered by another,
the application should be rejected and
dismissed outright, even without any
opposition on the part of the owner and
user of a previously registered label or
trademark. This is intended not only to
avoid confusion on the part of the public,
but also to protect an already used and
registered trademark and an established
goodwill. In the instant case, the
likelihood of confusion is apparent. The
two marks are almost spelled the same
way and are even pronounced in
practically the same manner in three (3)
syllables. Thus, when an ordinary
purchaser, for example, hears an
advertisement of D Inc.'s applied
trademark over the radio, chances are he
will associate it with M Pharmaceutical's
registered mark.
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Even if the marks do not refer to the


same classification of goods, does not
eradicate the possibility of mistake on the
part of the purchasing public to associate
the former with the latter. Indeed, the
registered trademark owner may use its
mark on the same or similar products, in
different segments of the market, and at
different price levels depending on
variations of the products for specific
segments of the market. The Court is
cognizant that the registered trademark
owner enjoys protection in product and
market areas that are the normal
potential expansion of his business.
Verily, when one applies for the
registration of a trademark or label which
is almost the same or that very closely
resembles
one
already
used
and
registered by another, the application
should be rejected and dismissed
outright, even without any opposition on
the part of the owner and user of a
previously registered label or trademark.
This is intended not only to avoid
confusion on the part of the public, but
also to protect an already used and
registered trademark and an established
goodwill. [Dermaline, Inc. v. Myra
Pharmaceuticals, GR No. 190065, 16
August 2010]
10.
K Inc. had the trademarks,
trading styles, company names
and business names "KENNEX",
"KENNEX & DEVICE", "PRO
KENNEX" and "PRO-KENNEX", in
its name. S Corp. filed an action
against
K
Inc.
alleging
trademark infringement, saying
that K Inc. is a mere distributor
of the goods covered by the
marks and it is the actual
owner of the marks. However, S
Corp.s
registration
of
the
Starr Weigand 2014
Commercial Law

marks was cancelled by in a


registration cancellation case.
Can the action prosper? Was
there unfair competition?
No. By operation of law, specifically
Section 19 of RA 166, the trademark
infringement aspect of S Corp.'s case has
been rendered moot and academic in
view of the finality of the decision in the
Registration Cancellation Case. In short, S
Corp. is left without any cause of action
for trademark infringement since the
cancellation
of
registration
of
a
trademark deprived it of protection from
infringement from the moment judgment
or order of cancellation became final. To
be sure, in a trademark infringement, title
to the trademark is indispensable to a
valid cause of action and such title is
shown by its certificate of registration.
With its certificates of registration over
the disputed trademarks effectively
cancelled with finality, S Corp.'s case for
trademark infringement lost its legal
basis and no longer presented a valid
cause of action.
Likewise, there can be no infringement
committed by K Inc. who was adjudged
with finality to be the rightful owner of
the
disputed
trademarks
in
the
Registration Cancellation Case. Even prior
to the cancellation of the registration of
the disputed trademarks, S Corp. - as a
mere distributor and not the owner
cannot assert any protection from
trademark infringement as it had no right
in the first place to the registration of the
disputed
trademarks.
In
fact,
jurisprudence holds that in the absence
of any inequitable conduct on the part of
the manufacturer, an exclusive distributor
who employs the trademark of the
manufacturer
does
not
acquire
proprietary rights of the manufacturer,
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and a registration of the trademark by


the distributor as such belongs to the
manufacturer, provided the fiduciary
relationship does not terminate before
application for registration is filed.

Enterprises., GR No. 169974, April 20,


2010]

To establish trademark infringement, the


following elements must be proven: (1)
the validity of plaintiff's mark; (2) the
plaintiff's ownership of the mark; and (3)
the use of the mark or its colorable
imitation by the alleged infringer results
in "likelihood of confusion." Based on
these elements, it is immediately obvious
that the second element the plaintiff's
ownership of the mark - was what the
Registration Cancellation Case decided
with finality. On this element depended
the validity of the registrations that, on
their own, only gave rise to the
presumption of, but was not conclusive
on, the issue of ownership.
.
Likewise, there is also no unfair
competition in the instant case. From
jurisprudence, unfair competition has
been defined as the passing off (or
palming off) or attempting to pass off
upon the public of the goods or business
of one person as the goods or business of
another with the end and probable effect
of deceiving the public. The essential
elements of unfair competition are (1)
confusing similarity in the general
appearance of the goods; and (2) intent
to deceive the public and defraud a
competitor. In the instant case, there is
no evidence exists showing that K Inc.
ever attempted to pass off the goods it
sold (i.e. sportswear, sporting goods and
equipment) as those of S Corp. In
addition, there is no evidence of bad faith
or fraud imputable to K Inc. in using the
disputed
trademarks.
[Superior
Commercial
Enterprises
v.
Kunnan

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Commercial Law

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Banking Laws
1. The BSP, through the Monetary
Board is granted the power and
authority to prescribe different
maximum rates of interest
which may be imposed for a
loan or renewal thereof or the
forbearance of any money,
goods or credits, provided that
the
changes
are
effected
gradually and announced in
advance. Thus, it issued CB
Circular No. 905, removing all
interest ceilings and suspended
the usury law. Did the BSP
commit
grave
abuse
of
discretion in issuing CB Circular
No. 905?
No. The BSP has the power to do so. It
has been held that CB Circular No. 905
did not repeal nor in anyway amend the
Usury Law but simply suspended the
latters effectivity; that a [CB] Circular
cannot repeal a law, [for] only a law can
repeal another law; that by virtue of CB
Circular No. 905, the Usury Law has been
rendered ineffective; and Usury has
been
legally
non-existent
in
our
jurisdiction. Interest can now be charged
as lender and borrower may agree upon.
The law creating the BSP covered only
loans extended by banks, whereas under
Section 1-a of the Usury Law, as
amended, the BSP-MB may prescribe the
maximum rate or rates of interest for all
loans or renewals thereof or the
forbearance of any money, goods or
credits, including those for loans of low
priority such as consumer loans, as well
as such loans made by pawnshops,
finance companies and similar credit
institutions. It even authorizes the BSPMB to prescribe different maximum rate
or rates for different types of borrowings,
Starr Weigand 2014
Commercial Law

including
deposits
and
deposit
substitutes,
or
loans
of
financial
intermediaries. By lifting the interest
ceiling, CB Circular No. 905 merely
upheld the parties freedom of contract to
agree freely on the rate of interest.
Article 1306 of the New Civil Code
provides that the contracting parties may
establish such stipulations, clauses, terms
and conditions as they may deem
convenient, provided they are not
contrary to law, morals, good customs,
public order, or public policy.
Nothing in CB Circular No. 905 grants
lenders a carte blanche authority to raise
interest rates to levels which will either
enslave their borrowers or lead to a
hemorrhaging of their assets. Stipulations
authorizing iniquitous or unconscionable
interests have been invariably struck
down for being contrary to morals, if not
against the law. Indeed, under Article
1409 of the Civil Code, these contracts
are deemed inexistent and void ab initio,
and therefore cannot be ratified, nor may
the right to set up their illegality as a
defense be waived. Nonetheless, the
nullity of the stipulation of usurious
interest does not affect the lenders right
to recover the principal of a loan, nor
affect
the
other
terms
thereof.
[Advocates for Truth in Lending v. Bangko
Sentral Monetary Board, G.R. No. 192986,
15 January 2013]
2. The late Mr. G deposited 2
million
pesos
with
PALI.
Conflicting
claims
of
his
relatives were presented to
PALI seeking the release of the
money
deposited.
Pending
investigation of the claims,
PALI deposited the money with
UCPB, in account which was in
trust for the heirs of Mr. G.
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UCPB however allowed PALI to


withdraw the money leaving a
balance of around 9 thousand
pesos. Can UCPB be held liable
for
the
allowing
the
withdrawal?
No. UCPB did not become a trustee by
the mere opening of the ACCOUNT. While
this may seem to be the case, by reason
of the fiduciary nature of the banks
relationship with its depositors, this
fiduciary relationship does not convert
the contract between the bank and its
depositors from a simple loan to a trust
agreement, whether express or implied.
It simply means that the bank is obliged
to observe high standards of integrity
and performance in complying with its
obligations under the contract of simple
loan. Per Article 1980 of the Civil Code, a
creditor-debtor
relationship
exists
between the bank and its depositor. The
savings deposit agreement is between
the bank and the depositor; by receiving
the deposit, the bank impliedly agrees to
pay upon demand and only upon the
depositors order. [Joseph Goyanko, Jr., as
administrator of the Estate of Joseph
Goyanko, Sr. vs. United Coconut Planters
Bank, Mango Avenue Branch, G.R. No.
179096. February 6, 2013]
3. BOMC was created by a BSP
circular to provide support
service for banks, and is a
subsidiary of BPI. A service
agreement was entered into by
BPI and BOMC where the latter
provides services to a branch of
the former. Later on, the
services included those for
another branch. As a result,
some services of the employees
of BPI were transferred to
BOMC. This was contested by
Starr Weigand 2014
Commercial Law

the Union of BPI, mainly


invoking
DOLE
department
order No. 10 which provides
what jobs may be contracted
out. BSP has a circular on bank
service contracts, while the
DOLE has a department order
governing what jobs may be
contracted
out.
Which
administrative issuance should
prevail?
Both actually apply. There is no conflict
between D.O. No. 10 and CBP Circular No.
1388. In fact, they complement each
other.
Consistent with the maxim, interpretare
et concordare leges legibus est optimus
interpretandi modus, a statute should be
construed not only to be consistent with
itself but also to harmonize with other
laws on the same subject matter, as to
form a complete, coherent and intelligible
system
of
jurisprudence.35
The
seemingly conflicting provisions of a law
or of two laws must be harmonized to
render each effective.36 It is only when
harmonization is impossible that resort
must be made to choosing which law to
apply.
In the case at bench, the Union submits
that while the Central Bank regulates
banking, the Labor Code and its
implementing
rules
regulate
the
employment relationship. To this, the
Court agrees. The fact that banks are of a
specialized industry must, however, be
taken into account. The competence in
determining which banking functions may
or may not be outsourced lies with the
BSP. This does not mean that banks can
simply outsource banking functions
allowed by the BSP through its circulars,
without giving regard to the guidelines
2013 & 2014 Q and A|

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set forth under D.O. No. 10 issued by the


DOLE.
While D.O. No. 10, Series of 1997,
enumerates the permissible contracting
or subcontracting activities, it is to be
observed that, particularly in Sec. 6(d)
invoked by the Union, the provision is
general in character "x x x Works or
services not directly related or not
integral to the main business or operation
of the principal x x x." This does not
limit
or
prohibit
the
appropriate
government agency, such as the BSP, to
issue rules, regulations or circulars to
further and specifically determine the
permissible services to be contracted out.
CBP Circular No. 138838 enumerated
functions which are ancillary to the
business of banks, hence, allowed to be
outsourced. Thus, sanctioned by said
circular, BPI outsourced the cashiering
(i.e., cash-delivery and deposit pick-up)
and accounting requirements of its Davao
City branches D.O. No. 10 is but a guide
to determine what functions may be
contracted out, subject to the rules and
established jurisprudence on legitimate
job contracting and prohibited labor only
contracting. Even if the Court considers
D.O. No. 10 only, BPI would still be within
the bounds of D.O. No. 10 when it
contracted out the subject functions. This
is because the subject functions were not
related or not integral to the main
business or operation of the principal
which is the lending of funds obtained in
the form of deposits. From the very
definition of banks as provided under
the General Banking Law, it can easily be
discerned that banks perform only two (2)
main or basic functions deposit and loan
functions. Thus, cashiering, distribution
and bookkeeping are but ancillary
functions
whose
outsourcing
is
sanctioned under CBP Circular No. 1388
Starr Weigand 2014
Commercial Law

as well as D.O. No. 10. Even BPI itself


recognizes
that
deposit
and
loan
functions cannot be legally contracted
out as they are directly related or integral
to the main business or operation of
banks. The CBPs Manual of Regulations
has even categorically stated and
emphasized on the prohibition against
outsourcing inherent banking functions,
which refer to any contract between the
bank and a service provider for the latter
to supply, or any act whereby the latter
supplies, the manpower to service the
deposit transactions of the former. [BPI
Employees
Union-Davao
City-Fubu
(BPIEU-Davao City-Fubu) v. Bank of the
Philippine Islands (BPI), et al., G.R. No.
174912, July 24, 2013]
4. A was the corporate secretary
of BPI, a bank. He was also the
corporate secretary of IPB, a
quasi-bank. Does this violate
the
rule
on
interlocking
directors?
No, not exactly. As a general rule, there
shall be no concurrent officerships,
including secondments, between banks,
or between an bank and a quasi-bank or
a non-bank financial institution. However,
subject to approval of the Monetary
Board, concurrent officerships, including
secondments, may be allowed for
concurrent officiership positions as
corporate
secretary
or
assistance
corporate secretary between bank/s,
quasi-bank/s and non-bank financial
institutions, provided that proof of
disclosure to and consent from all of the
involved financial institutions, on the
concurrent officership positions, shall be
submitted
to
the
BSP.
Likewise,
concurrent officership positions in the
same capacity which do not involve
management functions, i.e. internal
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auditors, corporate secretary, assistant


corporate secretary and security officer,
between a quasi-bank and one or more of
its subsidiary quasi-banks or non-bank
financial institutions, or between a quasibank and/or a non-bank financial
institution, or between bank/s, quasibank/s
and
non-bank
financial
institution/s, other than investment
houses, may also be allowed. Provides
than in the last two instances, at least
20% of the equity of each bank, quasibank and non-bank financial institution is
owned by a holding company or by any
banks or quasi-banks within the group.
[BSP Circular No. 851, series of 2014,
amending Section X145 of the Manual of
Regulations for Banks (MORB) and
Section 4145Q of the Manual for
Regulations
for Non-Bank Financial
Institutions (MORNBFI)]
5. BSP Circular No. 799 was issued
in 2013, which changed the
legal rate of interest for loans
and forebearances of money
from 12% to 6% per annum.
How will this affect the rules
governing interest rates laid
down by the Court in the case
of Eastern Shipping Lines?
The guidelines laid down in the case of
Eastern Shipping Lines are accordingly
modified to embody BSP-MB Circular No.
799, as follows:
I.

When an obligation, regardless


of its source, i.e., law, contracts,
quasicontracts, delicts or quasidelicts
is
breached,
the
contravenor can be held liable
for damages. The provisions
under Title XVIII on Damages
of the Civil Code govern in

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Commercial Law

determining the measure


recoverable damages.
II.

of

With regard particularly to an


award of interest in the concept
of actual and compensatory
damages, the rate of interest, as
well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached,


and it consists in the payment of a
sum of money, i.e., a loan or
forbearance of money, the interest
due should be that which may have
been
stipulated
in
writing.
Furthermore, the interest due shall
itself earn legal interest from the
time it is judicially demanded. In
the absence of stipulation, the rate
of interest shall be 6% per annum
to be computed from default, i.e.,
from
judicial
or
extrajudicial
demand under and subject to the
provisions of Article 1169 of the
Civil Code.
6. When
an
obligation,
not
constituting a loan or forbearance
of money, is breached, an interest
on the amount of damages
awarded may be imposed at the
discretion of the court at the rate of
6% per annum. No interest,
however, shall be adjudged on
unliquidated claims or damages,
except when or until the demand
can be established with reasonable
certainty.
Accordingly, where the demand is
established with reasonable certainty, the
interest shall begin to run from the time
the
claim
is
made
judicially
or
extrajudicially (Art. 1169, Civil Code), but
when such certainty cannot be so
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reasonably established at the time the


demand is made, the interest shall begin
to run only from the date the judgment of
the court is made (at which time the
quantification of damages may be
deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any
case, be on the amount finally adjudged.
7. When the judgment of the court
awarding a sum of money becomes
final and executory, the rate of
legal interest, whether the case
falls
under
paragraph
1
or
paragraph 2, above, shall be 6%
per annum from such finality until
its satisfaction, this interim period
being deemed to be by then an
equivalent to a forbearance of
credit. And, in addition to the
above,
judgments
that
have
become final and executory prior to
July 1, 2013, shall not be disturbed
and
shall
continue
to
be
implemented applying the rate of
interest fixed therein.
[Dario Nacar v. Gallery Frames and/or
Felipe Bordey, Jr., G.R. No. 189871,
August 13, 2013.]
8. M obtained a loan with time
deposit
from
Prubank
evidenced by a promissory
note, wherein it was stipulated
that the loan was subject to
21%
p.a.,
attorney's
fees
equivalent to 15% of the total
amount due but not less than
P200.00 and, in case of default,
a
penalty
and
collection
charges of 12% p.a. of the total
amount due, with maturity date
of 10 January 1985. The loan
was renewed up to 17 February
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Commercial Law

1985. Through a deed of


assignment, M authorized BPI
to pay his loan obligations with
Prubank. M and his wife again
obtained a loan from BPI
covered by a promissory note
with maturity date of 22 March
1990, to bear interest at 23%
p.a.,
with
attorney's
fees
equivalent to 15% p.a. of the
total amount due. To secure
such loan, M mortgaged his
land in favor of BPI. M failed to
pay his loan obligations, thus
BPI
sought
to
have
the
mortgage
extrajudicially
foreclosed. Thereafter, M and
his wife filed an action for
annulment of mortgage. Are
the interest rate of 23% p.a.
and the penalty charge of 12%
p.a.,
excessive
or
unconscionable?
No. Jurisprudence establish that the 24%
p.a. stipulated interest rate was not
considered unconscionable, thus, the
23% p.a. interest rate imposed on Ms
loan in this case can by no means be
considered excessive or unconscionable.
In Medel v. Court of Appeals, the Court
found the stipulated interest rate of 66%
p.a. or a 5.5% per month on a
P500,000.00
loan
excessive,
unconscionable and exorbitant, hence,
contrary to morals if not against the law
and declared such stipulation void. In
Toring v. Spouses Ganzon-Olan, the
stipulated interest rates involved were
3% and 3.81% per month on a P10 million
loan, which the Court found under the
circumstances excessive and reduced the
same to 1% per month. While in Chua v.
Timan, where the stipulated
interest rates were 7% and 5% a month,
which are equivalent to 84% and 60%
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p.a., respectively, the Court reduced the


same to 1% per month or 12% p.a. the
Court said that it need not unsettle the
principle it had affirmed in a plethora of
cases that stipulated interest rates of 3%
per month and higher are excessive,
unconscionable and exorbitant, hence,
the stipulation was void for being
contrary to morals. However, in Spouses
Zacarias Bacolor and Catherine Bacolor v.
Banco Filipino Savings and Mortgage
Bank, Dagupan City Branch, this Court
held that the interest rate of 24% per
annum on a loan of P244,000.00, agreed
upon by the parties, may not be
considered
as
unconscionable
and
excessive. As such, the Court ruled that
the borrowers cannot renege on their
obligation to comply with what is
incumbent upon them under the contract
of loan as the said contract is the law
between the parties and they are bound
by its stipulations.
Also, in Garcia v. Court of Appeals, the
Court sustained the agreement of the
parties to a 24% per annum interest on
an P8,649,250.00 loan finding the same
to be reasonable and clearly evidenced
by the amended credit line agreement
entered into by the parties as well as two
promissory notes executed by the
borrower in favor of the lender.
Likewise, the stipulated 12% p.a. penalty
charge
is
not
excessive
or
unconscionable. In Ruiz v. CA, the Court
has held that 1% surcharge on the
principal loan for every month of default
is valid. This surcharge or penalty
stipulated in a loan agreement in case of
default partakes of the nature of
liquidated damages under Art. 2227 of
the New Civil Code, and is separate and
distinct from interest payment. Also
referred to as a penalty clause, it is
expressly recognized by law. It is an
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Commercial Law

accessory undertaking to assume greater


liability on the part of an obligor in case
of breach of an obligation. The obligor
would then be bound to pay the
stipulated amount of indemnity without
the necessity of proof on the existence
and on the measure of damages caused
by the breach. The enforcement of the
penalty can be demanded by the creditor
only when the non-performance is due to
the fault or fraud of the debtor. The nonperformance
gives
rise
to
the
presumption of fault; in order to avoid the
payment of the penalty, the debtor has
the burden of proving an excuse - the
failure of the performance was due to
either force majeure or the acts of the
creditor himself. In the instant case,
petitioners defaulted in the payment of
their loan obligation with respondent
bank and their contract provided for the
payment of 12% p.a. penalty charge, and
since there was no showing that
petitioners' failure to perform their
obligation was due to force majeure or to
respondent bank's acts, petitioners
cannot now back out on their obligation
to pay the penalty charge. [Mallari v.
Prudential Bank, G.R. No. 197861, 5 June
2013]
9. The Lims obtained a loan from
DBP to finance their business.
It was covered by a promissory
note wherein it was stipulated
that the loan is subject to an
interest rate of 9% per annum
and penalty charge of 11% per
annum.
Another
loan
was
obtained by the Lim, covered
by another promissory note
with an interest rate of 12% per
annum and a penalty charge of
1/3% per month on the overdue
amortization. The loans were
covered by mortgages on the
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properties of the Lims. They


failed to pay their loans as a
result of the collapse of their
business.
DBP
sought
to
foreclose the mortgage and sell
the properties, but the Lims
asked for an extension of the
period within which they could
pay. They were granted an
extension,
subject
to
the
condition that they will be
liable for an additional interest
of 18.5%, and other additional
penalties. Is the imposition of
additional
penalties
and
interests allowed under the
law?
No. The imposition of additional interest
and penalties not stipulated in the
Promissory Notes, this should not be
allowed. Article 1956 of the Civil Code
specifically states that "no interest shall
be due unless it has been expressly
stipulated in writing." Thus, the payment
of interest and penalties in loans is
allowed only if the parties agreed to it
and reduced their agreement in writing.
In this case, the Lims never agreed to pay
additional interest and penalties. Hence,
the imposition of additional interest and
penalties are illegal, and thus, void. [Lim
v. Development Bank of the Philiipines,
G.R. No. 177050, July 01, 2013]
10.
The Spouses J obtained a
loan from Chinabank covered
by
two
promissory
notes,
secured
by
real
estate
mortgage over their property in
White Plains. They failed to pay
their loan, thus the mortgage
was
foreclosed.
Since
the
proceeds of the sale of the
mortgage property did not
cover the entire amount of the
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Commercial Law

loan,
Chinabank
filed
and
action against the Spouses J for
collection of the remaining
balance. During the trial it was
found that the interest rate on
the loan changes every month
based on the prevailing market
rate and DBP allegedly notified
the spouses of the prevailing
rate by calling them monthly
before their account became
past due. DBP also alleged that
the spouses agreed to a
changing
interest
rate
by
signing the promissory note,
indicating that they agreed to
pay interest at the prevailing
rate. Can DBP subject the loan
of the spouses to a changing
rate of interest?
No. It is now settled that an escalation
clause is void where the creditor
unilaterally determines and imposes an
increase in the stipulated rate of interest
without the express conformity of the
debtor. Such unbridled right given to
creditors
to
adjust
the
interest
independently
and upwardly
would
completely take away from the debtors
the right to assent to an important
modification in their agreement and
would also negate the element of
mutuality in their contracts. While a
ceiling on interest rates under the Usury
Law was already lifted under Central
Bank Circular No. 905, nothing therein
"grants lenders carte blanche authority to
raise interest rates to levels which will
either enslave their borrowers or lead to a
hemorrhaging of their assets." The
provision in the promissory notes of the
Spouses J authorizing DBP to increase,
decrease or otherwise change from time
to time the rate of interest and/or bank
charges "without advance notice" to the
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spouses, "in the event of change in the


interest rate prescribed by law or the
Monetary Board of the Central Bank of
the Philippines," does not give DBP
unrestrained freedom to charge any rate
other than that which was agreed upon.
Here, the monthly upward/downward
adjustment of interest rate is left to the
will of respondent bank alone. It violates
the essence of mutuality of the contract.
Modifications in the rate of interest for
loans pursuant to an escalation clause
must be the result of an agreement
between the parties. Unless such
important change in the contract terms is
mutually agreed upon, it has no binding
effect. In the absence of consent on the
part of the spouses to the modifications
in the interest rates, the adjusted rates
cannot bind them. Monthly telephone
calls to the spouses advising them of the
prevailing interest rates would not suffice.
A detailed billing statement based on the
new imposed interest with corresponding
computation of the total debt should
have been provided by the DBP to enable
the spouses to make an informed
decision. An appropriate form must also
be signed by the spouses to indicate their
conformity to the new rates. Compliance
with these requisites is essential to
preserve the mutuality of contracts. For
indeed, one-sided impositions do not
have the force of law between the
parties, because such impositions are not
based on the parties essential equality.
Hence, the interest charged over the
interest rate indicated in the promissory
notes is invalid. [Juico v. China Banking
Corporation, G.R. No. 187678, April 10,
2013]
11.
Spouses A obtained a loan
from PNB, secured by a real
estate mortgage, and covered
by
12
promissory
notes
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Commercial Law

providing for varying interest


rates of 17.5% to 27% per
interest period. It was agreed
upon by the parties that the
rate
of
interest
may
be
increased or decreased for the
subsequent interest periods,
with prior notice to the spouses
in the event of changes in
interest rates prescribed by law
or the Monetary Board, or in
the banks overall cost of
funds. Can PNB impose varying
rates of interest on the loan of
the spouses?
No. The interest rates imposed by DBP
are excessive and arbitrary. Thus, the
foregoing interest rates imposed on the
Spouses loan obligation without their
knowledge and consent should be
disregarded, not only for being iniquitous
and exorbitant, but also for being
violative of the principle of mutuality of
contracts. In the instant case, it is clear
from the contract of loan between the
spouses and the bank that the spouses,
as borrowers, agreed to the payment of
interest on their loan obligation. That the
rate of interest was subsequently
declared illegal and unconscionable does
not entitle the spouses to stop payment
of interest. It should be emphasized that
only the rate of interest was declared
void. The stipulation requiring the
Spouses to pay interest on their loan
remains valid and binding. They are,
therefore, liable to pay interest from the
time they defaulted in payment until their
loan is fully paid. Pursuant to Circular No.
799, series of 2013, issued by the Office
of the Governor of the BSP on 21 June
2013, and in accordance with the ruling
of the Supreme Court in the recent case
of Dario Nacar v. Gallery Frames and/or
Felipe Bordey, Jr., effective 1 July 2013,
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the rate of interest for the loan or


forbearance of any money, goods or
credits
and the rate allowed in
judgments, in the absence of an express
contract as to such rate of interest, shall
be six percent (6%) per annum.
Accordingly, the rate of interest of 12%
per
annum
on
petitioners-spouses
obligation shall apply from the date of
default until 30 June 2013 only. From 1
July 2013 until fully paid, the legal rate of
6% per annum shall be applied to the
Spouses unpaid obligation. [Andal v.
Philippine National Bank, G.R. No.
194201, November 27, 2013]
12.
ECBI
was
a
banking
institution which underwent
BSPs general examination. It
was issued a cease and desist
order and enjoined it from
pursuing
certain
acts
and
transactions
that
were
considered unsafe or unsound
banking practices, and from
doing such other acts or
transactions constituting fraud
or
might
result
in
the
dissipation of its assets. This
was the result of the continuing
refusal of ECBIs BOD to allow
the examination of the BSP.
Thereafter, for defying the
cease and desist order, BSP
issued as resolution placing it
under receivership. Was the
action of the BSP proper?
Yes. The Monetary Board (MB) may forbid
a bank from doing business and place it
under receivership without prior notice
and hearing. This is called the close
now, hear later doctrine. It must be
emphasized that R.A .No. 7653 is a later
law and under said act, the power of the
MB over banks, including rural banks, was
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Commercial Law

increased and expanded. The Court, in


several cases, upheld the power of the
MB to take over banks without need for
prior hearing. Prior hearing is not
necessary inasmuch as the law entrusts
to the MB the appreciation and
determination of whether any or all of the
statutory grounds for the closure and
receivership of the erring bank are
present. The MB, under R.A. No. 7653,
has been invested with more power of
closure and placement of a bank under
receivership for insolvency or illiquidity,
or because the banks continuance in
business would probably result in the loss
to depositors or creditors.
Accordingly, the MB can immediately
implement its resolution prohibiting a
banking institution to do business in the
Philippines and, thereafter, appoint the
PDIC as receiver. The procedure for the
involuntary closure of a bank is summary
and expeditious in nature. Such action of
the MB shall be final and executory, but
may be later subjected to a judicial
scrutiny via a petition for certiorari to be
filed by the stockholders of record of the
bank representing a majority of the
capital stock. Obviously, this procedure is
designed to protect the interest of all
concerned, that is, the depositors,
creditors and stockholders, the bank itself
and the general public. The protection
afforded public interest warrants the
exercise of a summary closure.
Management take-over under Section 11
of R.A. No. 7353 was no longer feasible
considering the financial quagmire that
engulfed ECBI showing serious conditions
of insolvency and illiquidity. Besides,
placing ECBI under receivership would
effectively put a stop to the further
draining of its assets. [Alfeo D. Vivas, on
his behalf and on behalf of the
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Shareholders or Eurocredit Community


Bank v. The Monetary Board of the
Bangko Sentral ng Pilipinas and the
Philippine Deposit Insurance Corporation,
G.R. No. 191424, August 7, 2013]
13.
G Corp. obtained a loan
from DBP bank to finance its
development
of
a
resort
complex.
To
secure
it,
a
promissory note was executed
by the G Corp. and mortgages
were
constituted
on
its
properties. Also, a cash equity
was put up. The loan was
released to G Corp. in tranches,
but DBP eventually refused to
release the balance thereof,
alleging
that
it
failed
to
develop
the
said
resort
complex. DBP then foreclose
the
mortgages,
which
prompted G Corp. to file an
action for specific performance
against DBP. Was it proper for
DBP
to
foreclose
the
mortgages?
No. Considering that it had yet to release
the entire proceeds of the loan, DBP
could not yet make an effective demand
for payment upon G Corp. to perform its
obligation under the loan. Being a
banking institution, DBP owed it to G
Corp. to exercise the highest degree of
diligence, as well as to observe the high
standards of integrity and performance in
all its transactions because its business
was imbued with public interest. The high
standards were also necessary to ensure
public confidence in the banking system.
The stability of banks largely depends on
the confidence of the people in the
honesty and efficiency of banks. Thus,
DBP had to act with great care in
applying the stipulations of its agreement
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Commercial Law

with G Corp., lest it erodes such public


confidence. Yet, DBP failed in its duty to
exercise the highest degree of diligence
by prematurely foreclosing the mortgages
and
unwarrantedly
causing
the
foreclosure sale of the mortgaged
properties despite G Corp. not being yet
in default. [Development Bank of the
Philippines (DBP) v. Guaria Agricultural
and Realty Development Corporation,
G.R. No. 160758. January 15, 2014]
14.
The spouses S applied for
a loan which was granted by
BPI for a term of six months,
secured by a mortgage over
land owned by the Spouses S.
the Spouses S later on obtained
a credit line from BPI in the
amount of P5.7 million. The
mortgage was released on the
representation of the spouses
that the proceeds will be used
to pay the loans, but the same
remained
unpaid.
Having
defaulted
on
their
loan
obligations,
BPI
demanded
payment. However, the spouses
filed a complaint against BPI, to
maintain the status quo, and
alleged that BPI "deliberately
refused to comply with the
condition/undertaking of the
loan for IGLF endorsement and
approval" until the maturity
date of the loan lapsed to their
great prejudice and irreparable
damage. They further alleged
they neither executed any P5.7
Million promissory note nor did
they receive P5.7 Million from
BPI. Thus, there is no existing
P5.7 Million Credit Line Facility
Agreement as far as they are
concerned. Is the contention of
the Spouses correct?
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No. It appears from the allegations that


Spouses S have misconstrued the
concept of a Credit Line Facility
Agreement. A credit line is "that amount
of money or merchandise which a banker,
merchant, or supplier agrees to supply to
a person on credit and generally agreed
to in advance." It is the fixed limit of
credit granted by a bank, retailer, or
credit card issuer to a customer, to the
full extent of which the latter may avail
himself of his dealings with the former
but which he must not exceed and is
usually intended to cover a series of
transactions in which case, when the
customers line of credit is nearly
exhausted, he is expected to reduce his
indebtedness by payments before making
any further drawings.

No. In case a stand-alone trust


corporation is a subsidiary or an affiliate
of a quasi-bank, the asset under
management of the trust corporation
shall not form part of the relevant
exposures of the parent quasi-bank for
purposes of calculating the single
borrowers limit and the ceilings for
accommodation to DOSRI of the parent
quasi-bank. Likewise, the purchase by the
trust corporation, in behalf of its client, of
securities and instruments issued by its
parent quasi-bank shall not form part of
the relevant exposure of the trust
corporation for purposes of the single
borrowers limits and DOSRI ceilings of
the said trust corporation. [BSP Circular
No. 849, Series of 2014]

Thus, contrary to the belief and


understanding of Spouses S, BPI does not
have to require the execution of
promissory note of the entire P5.7 Million
since a credit line as stated above, is
merely
a
fixed
limit
of
credit.
Furthermore, still applying the above
quoted definition, a credit line usually
presupposes a series of transactions until
the credit line is nearly exhausted. BPI is
not obliged to release the amount of P5.7
Million to Spouses S all at once, in a
single transaction. [Spouses Pio Dato and
Sonia Y. Sia v. Bank of the Philippine
Islands, G.R. No. 181873, November 27,
2013]
15.
ABC is a trust corporation
which is a subsidiary of Z Corp.,
a quasi-bank. Are the assets
held in trust by ABC included in
the computation of the single
borrowers limit for Z Corp.?

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Anti-Money Laundering Law


1. The AMLC filed an Urgent ExParte
Application
for
the
issuance of a freeze order with
the
CA
against
certain
monetary
instruments
and
properties of the L et al.,
pursuant to the Anti-Money
Laundering Act of 2001. This
application was based on the
February 1, 2005 letter of the
Office of the Ombudsman to the
AMLC, recommending that the
latter conduct an investigation
on L and his family for possible
violation of the law. The CA
granted the application and
issued
the
freeze
order.
Thereafter, an Urgent Motion
for Extension of Effectivity of
Freeze Order was filed, arguing
that if the bank accounts, web
accounts and vehicles of L not
continuously frozen, they could
be placed beyond the reach of
law enforcement authorities
and the governments efforts to
recover the proceeds of the Ls
unlawful activities would be
frustrated. In support of the
motion, it was alleged that
various cases against L were
presently being investigated by
the Ombudsman. The motion
for extension was also granted
by the CA. L sought to have the
extended freeze order lifted,
arguing that there was no
evidence
to
support
the
extension of the freeze order,
and that the extension not only
deprived them of their property
without due process; it also
punished them before their
guilt could be proven. The CA
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Commercial Law

subsequently
denied
this
motion. The Rules on Civil
Forfeiture
took
effect
and
stated that an extension of a
freeze order was only for a
maximum period of 6 months.
Thus, L asked the CA to
reconsider
its
resolution
denying his motion, insisting
that the freeze order should be
lifted
considering:
(a)
no
predicate
crime
has
been
proven to support the freeze
orders issuance; (b) the freeze
order expired six months after
it was issued; and (c) the freeze
order is provisional in character
and not intended to supplant a
case for money laundering.
Should
Ls
Motion
for
Reconsideration be granted?
Yes. A freeze order is an extraordinary
and interim relief issued by the CA to
prevent the dissipation, removal, or
disposal of properties that are suspected
to be the proceeds of, or related to,
unlawful activities as defined in Section
3(i) of RA No. 9160, as amended. The
primary objective of a freeze order is to
temporarily
preserve
monetary
instruments or property that are in any
way related to an unlawful activity or
money laundering, by preventing the
owner from utilizing them during the
duration of the freeze order. The relief is
pre-emptive in character, meant to
prevent the owner from disposing his
property and thwarting the States effort
in building its case and eventually filing
civil
forfeiture
proceedings
and/or
prosecuting the owner.
The Anti-Money Laundering Act of 2001,
as amended, from the point of view of the
freeze order that it authorizes, shows that
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the law is silent on the maximum period


of time that the freeze order can be
extended by the CA. The final sentence of
Section 10 of the Anti-Money Laundering
Act of 2001 provides, "the freeze order
shall be for a period of twenty (20) days
unless extended by the court." In
contrast, Section 55 of the Rule in Civil
Forfeiture Cases qualifies the grant of
extension "for a period not exceeding six
months" "for good cause" shown.
Nothing in the law grants the owner of
the "frozen" property any substantive
right to demand that the freeze order be
lifted, except by implication, i.e., if he can
show that no probable cause exists or if
the 20-day period has already lapsed
without any extension being requested
from and granted by the CA. Notably, the
Senate deliberations on RA No. 9160
even suggest the intent on the part of our
legislators to make the freeze order
effective until the termination of the case,
when necessary.
The silence of the law, however, does not
in any way affect the Courts own power
under the Constitution to "promulgate
rules concerning the protection and
enforcement of constitutional rights xxx
and procedure in all courts." Pursuant to
this power, the Court issued A.M. No. 0511-04-SC, limiting the effectivity of an
extended freeze order to six months to
otherwise leave the grant of the
extension to the sole discretion of the CA,
which may extend a freeze order
indefinitely or to an unreasonable amount
of time carries serious implications on
an individuals substantive right to due
process. This right demands that no
person be denied his right to property or
be subjected to any governmental action
that amounts to a denial. The right to due
process, under these terms, requires a
Starr Weigand 2014
Commercial Law

limitation or at least an inquiry on


whether sufficient justification for the
governmental action.
In this case, the law has left to the CA the
authority to resolve the issue of
extending the freeze order it issued.
Without doubt, the CA followed the law to
the letter, but it did so by avoiding the
fundamental laws command under its
Section 1, Article III. This command
sought to implement through Section
53(b) of the Rule in Civil Forfeiture Cases
which the CA erroneously assumed does
not apply. The extension granted by the
CA effectively bars L from using any of
the property covered by the freeze order
until after an eventual civil forfeiture
proceeding is concluded in their favor and
after they shall have been adjudged not
guilty of the crimes they are suspected of
committing. These periods of extension
are way beyond the intent and purposes
of a freeze order which is intended solely
as an interim relief; the civil and criminal
trial courts can very well handle the
disposition of properties related to a
forfeiture case or to a crime charged and
need not rely on the interim relief that
the appellate court issued as a guarantee
against loss of property while the
government is preparing its full case. A
freeze order is meant to have a
temporary effect; it was never intended
to supplant or replace the actual
forfeiture cases where the provisional
remedy - which means, the remedy is an
adjunct of or an incident to the main
action of asking for the issuance of an
asset preservation order from the court
where the petition is filed is precisely
available. For emphasis, a freeze order is
both a preservatory and preemptive
remedy.

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Thus, as a rule, the effectivity of a freeze


order may be extended by the CA for a
period not exceeding six months. Before
or upon the lapse of this period, ideally,
the Republic should have already filed a
case for civil forfeiture against the
property owner with the proper courts
and
accordingly
secure
an
asset
preservation order or it should have filed
the necessary information. Otherwise, the
property owner should already be able to
fully enjoy his property without any legal
process affecting it. However, should it
become completely necessary for the
Republic to further extend the duration of
the freeze order, it should file the
necessary motion before the expiration of
the six-month period and explain the
reason or reasons for its failure to file an
appropriate case and justify the period of
extension sought. The freeze order should
remain effective prior to the resolution by
the CA, which is hereby directed to
resolve this kind of motion for extension
with reasonable dispatch. [Ligot v.
Republic of the Philippines, G.R. No.
176944, March 6, 2013]

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Starr Weigand 2014


Commercial Law

2013 & 2014 Q and A|

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